AUDITING Chapter 18

17.) Tech Company has disclosed an uncertainty due to pending litigation. The auditor's decision to issue a qualified opinion on Tech's financial statements would most likely result from: A.) A lack of sufficient evidence. B.) The entity's lack of experience with such litigation. C.) An inability to estimate the amount of loss. D.) A lack of insurance coverage for possible losses from such litigation.

A.) A lack of sufficient evidence

2.) Auditors __________ an opinion when they are unable to form an opinion. A.) Disclaim B.) Qualify C.) Concur D.) Withdraw E.) Agree

A.) Disclaim

5.) When there is significant doubt as to the ability to continue as a going concern, a (n) _________ paragraph may be added. A.) Emphasis-of matter B.) Disclaimed C.) Modified D.) Qualified E.) Unqualified

A.) Emphasis-of-matter

13.) In which of the following situations would an auditor ordinarily issue an unqualified/unmodified financial statement audit opinion with no explanatory (or emphasis-of-matter/other-matter) paragraph? A.) The auditor decides to refer to the report of another auditor as a basis, in part, for the auditor's opinion. B.) The auditor wishes to emphasize that the entity had significant related-party transactions. C.) The auditor has substantial doubt about the entity's ability to continue as a going concern, but the circumstances are fully disclosed in the financial statements. D.) The entity issues financial statements that present financial position and results of operations but omits the statement of cash flows.

A.) The auditor decides to refer to the report of another auditor as a basis, in part, for the auditor's opinion.

22.) Which of the following best describes the auditor's responsibility for "other information" included in the annual report to stockholders that contains financial statements and the auditor's report? A.) The auditor has no obligation to corroborate the "other information" but should read the "other information" to determine whether it is materially inconsistent with the financial statements. B.) The auditor must modify the auditor's report to state that the other information "is unaudited" or "is not covered by the auditor's report." C.) The auditor has no obligation to read the "other information." D.) The auditor should extend the examination to the extent necessary to verify the "other information."

A.) The auditor has no obligation to corroborate the "other information" but should read the "other information" to determine whether it is materially inconsistent with the financial statements.

20.) Comparative financial statements for a public company include the prior year's statements, which were audited by a predecessor auditor. The predecessor's report is not presented along with the comparative financial statements. If the predecessor's report was unqualified, the successor should: A.) indicate in the auditor's report that the predecessor auditor expressed an unqualified opinion. B.) request that the predecessor auditor reissue the prior year's report. C.) obtain a letter of representations from the predecessor concerning any matters that might affect the successor's opinion. D.) express an opinion on the current year's statements alone and make no reference to the prior year's statements.

A.) indicate in the auditor's report that the predecessor auditor expressed an unqualified opinion.

8.) Auditors may add an emphasis-of-matter paragraph that refers to a matter that is _____________ presented or disclosed. A.) Incorrectly B.) Appropriately C.) Unfairly D.) Misleadingly E.) Wrongly

B.) Appropriately

15.) An auditor includes a separate paragraph in an otherwise unmodified financial statement audit report to emphasize that the entity being reported upon had significant transactions with related parties. The inclusion of this separate paragraph: A.) violates generally accepted auditing standards if this information is already disclosed in footnotes to the financial statements. B.) is appropriate and would not negate the unmodified opinion. C.) is considered an "except for" qualification of the opinion. D.) necessitates a revision of the opinion paragraph to include the phrase "with the foregoing explanation."

B.) is appropriate and would not negate the unmodified opinion.

6.) A (n) _________ opinion is appropriate if a material misstatement is considered persuasive. A.) Unmodified B.) Qualified C.) Adverse D.) Modified E.) Unqualified

C.) Adverse

3.) Limitation on the scope of an audit may create a situation in which the auditors are unable to obtain sufficient _____________________. A.) Balance Sheets B.) Accounting C.) Evidence D.) Paragraphs E.) Financial Statement

C.) Evidence

14.) A public entity changed from the straight-line method to the declining balance method of depreciation for all newly acquired assets. This change has no material effect on the current year's financial statements but is reasonably certain to have a substantial effect in later years. The client's financial statements contain no material misstatements and the auditor concurs with this change. If the change is disclosed in the notes to the financial statements, the auditor should issue a report with a(n): A.) Consistency modification. B.) Explanatory paragraph. C.) Unqualified opinion. D.) "Except for" qualified opinion.

C.) Unqualified Opinion

16.) Eagle Company, a public company, had a computer failure and lost part of its financial data. As a result, the auditor was unable to obtain sufficient audit evidence relating to Eagle's inventory account. Assuming the inventory account is at least material, the auditor would most likely choose either: A.) a qualified opinion with no explanatory paragraph or a qualified opinion with an explanatory paragraph. B.) a qualified opinion or an adverse opinion. C.) a qualified opinion or a disclaimer of opinion. D.) an unqualified opinion with no explanatory paragraph or an unqualified opinion with an explanatory paragraph.

C.) a qualified opinion or a disclaimer of opinion.

21.) When reporting on comparative financial statements for a private company, which of the following circumstances should ordinarily cause the auditor to change the previously issued opinion on the prior year's financial statements? A.) The prior year's financial statements are restated following the purchase of another company in the current year. B.) A scope limitation caused a qualified opinion on the prior year's financial statements, but the current year's opinion is properly unmodified. C.) A change in accounting principle causes the auditor to make a consistency modification in the current year's audit report. D.) A departure from generally accepted accounting principles caused an adverse opinion on the prior year's financial statements, and those statements have been properly restated.

D.) A departure from generally accepted accounting principles caused an adverse opinion on the prior year's financial statements, and those statements have been properly restated.

12.) Changes in accounting estimates ___________ result in an explanatory paragraph. A.) Always B.) Should C.) Do D.) Do Not E.) Eventually

D.) Do not

10.) If substantial doubt about a going concern exists, an _____________ paragraphs is the common resolution A.) Incorrect B.) Unqualified C.) Explanatory D.) Emphasis-of-matter E.) Inappropriate

D.) Emphasis-of-matter

18.) In which of the following circumstances would an auditor usually choose between issuing a qualified opinion or a disclaimer of opinion on a client's financial statements? A.) Unreasonable justification for a change in accounting principle. B.) Departure from generally accepted accounting principles. C.) Inadequate disclosure of accounting policies. D.) Inability of the auditor to obtain sufficient competent evidence.

D.) Inability of the auditor to obtain sufficient competent evidence.

24.) When an auditor is asked to express an opinion on an entity's rent and royalty revenues, he or she may: A.) not accept the engagement because to do so would be tantamount to agreeing to issue a piecemeal opinion. B.) accept the engagement, provided distribution of the auditor's report is limited to the entity's management. C.) not accept the engagement unless also engaged to audit the full financial statements of the entity. D.) accept the engagement, provided the auditor's opinion is expressed in a special report.

D.) accept the engagement, provided the auditor's opinion is expressed in a special report.

23.) When reporting on financial statements prepared on the basis of accounting used for income tax purposes, the auditor should include in the report a paragraph that: A.) refers to the authoritative pronouncements that explain the income tax basis of accounting being used. B.) justifies the use of the income tax basis of accounting. C.) emphasizes that the financial statements have not been examined in accordance with generally accepted auditing standards. D.) states that the income tax basis of accounting is a basis of accounting other than generally accepted accounting principles.

D.) states that the income tax basis of accounting is a basis of accounting other than generally accepted accounting principles.

11.) En emphasis-of-matter paragraph always ____________ the opinion paragraph. A.) Precedes B.) Replaces C.) Overlaps D.) Includes E.) Follows

E.) Follows

4.) Qualified Opinions are issued when the financial statements are _____________ misstated. A.) Always B.) Constantly C.) Consistently D.) Not E.) Materially

E.) Materially

9.) A going concern is to evaluated for a period not to exceed _________ beyond the date of the financial statements. A.) One Quarter B.) One Month C.) One Period D.) One Day E.) One Year

E.) One Year