Chapter 12: Reports on Audited Financial Statements

When auditors conclude that a material and pervasive departure from GAAP exists in an entity's financial statements, which of the following phrases would most likely be included in their report? A. "Do not present fairly in all material respects." B. "Except for the effects of the departure from generally accepted accounting principles, as discussed in the preceding paragraph." C. "We were engaged to audit the accompanying financial statements." D. "As a result of the departures discussed in the following paragraph."

A. "Do not present fairly in all material respects."

Which of the following statements is not included in the Auditor's Responsibility section of the standard (unmodified) report? A. "In accordance with accounting principles generally accepted in the United States of America." B. "We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion." C. "An audit also includes evaluating the appropriateness of accounting policies used..." D. "Those standards require that we plan and perform the audit to obtain reasonable assurance..."

A. "In accordance with accounting principles generally accepted in the United States of America."

What is the major difference between a reissued report and an updated report? A. An updated report considers information that has come to their attention since the date of the original report, while a reissued report does not consider this information. B. An updated report can be presented along with the entity's financial statements, but a reissued report cannot be presented along with the entity's financial statements. C. An updated report will express a different opinion on the prior years' financial statements that were originally expressed by the auditors, while a reissued report will express the same opinion. D. An updated report will not express an opinion other than an unmodified opinion, while a reissued report can express an unmodified opinion, qualified opinion, adverse opinion, or disclaimer of opinion.

A. An updated report considers information that has come to their attention since the date of the original report, while a reissued report does not consider this information.

For each of the sentences or phrases below, indicate, by letter, in which section of the standard (unmodified) report on the entity's financial statements the sentence or phrase would appear. We have audited the accompanying financial statements of... A. Introductory paragraph B. Management's Responsibility section C. Auditor's Responsibility section D. Opinion paragraph

A. Introductory paragraph

If financial statements contain a material but non-pervasive departure from generally accepted accounting principles, the auditors should render a(n) A. Qualified opinion with reference to departure. B. adverse opinion with scope limitation reference. C. adverse opinion with reference to departure. D. disclaimer of opinion.

A. Qualified opinion with reference to departure.

Various Reporting Situations. Assume that the auditors encountered the following separate situations when deciding on the report to issue for the current-year financial statements. (If the kind of opinion depends on the reason for the scope limitation (if applicable), the degree of materiality, and/or the pervasiveness of the matter discussed, then choose an answer choice that encompasses the two possible opinion types.) The entity failed to capitalize lease assets and obligations but explained them fully in the notes to the financial statements. These lease obligations meet the criteria for capitalization under ASC 840. A. Qualified or adverse B. Qualified or disclaimer of opinion C. Unmodified

A. Qualified or adverse

Various Reporting Situations. Assume that the auditors encountered the following separate situations when deciding on the report to issue for the current-year financial statements. (If the kind of opinion depends on the reason for the scope limitation (if applicable), the degree of materiality, and/or the pervasiveness of the matter discussed, then choose an answer choice that encompasses the two possible opinion types.) The entity is defending a lawsuit on product liability claims. (Customers allege that power saw safety guards were improperly installed.) All facts about the lawsuit are disclosed in the notes to the financial statements, but the auditors believe the entity should record a loss based on a probable settlement mentioned by the entity's attorneys. A. Qualified or adverse B. Qualified or disclaimer of opinion C. Unmodified

A. Qualified or adverse

If the opinion issued on prior years' financial statements is no longer appropriate and financial statements are presented in comparative form, the auditors' current report should A. Reference the type of opinion issued on the prior years' financial statements and indicate that the current opinion on these financial statements differs from that expressed in the prior years. B. Not reference the prior years' financial statements. C. Indicate that the opinion on the prior years' financial statements cannot be relied upon. D. Express the revised opinion on the prior years' financial statements without referencing the previously-issued opinion.

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

How is the auditors' responsibility for expressing the opinion on financial statements disclosed in the standard (unmodified) report for a nonpublic company? A. Stated explicitly in the Auditor's Responsibility section. B. Stated explicitly in the opinion paragraph. C. Unstated but understood in the Auditor's Responsibility section. D. Stated explicitly in the introductory paragraph.

A. Stated explicitly in the Auditor's Responsibility section.

When auditors lack independence, which of the following is true about the report on the entity's financial statements that should be issued? A. The auditors should disclaim an opinion and should state specifically that they are not independent. B. The auditors should disclaim an opinion but not mention that they are not independent. C. The auditors should issue an unmodified opinion with an other-matter paragraph stating that they are not independent. D. The auditors should issue a qualified opinion with an other-matter paragraph stating that they are not independent.

A. The auditors should disclaim an opinion and should state specifically that they are not independent.

Which of the following would cause the auditors to issue a report on the entity's financial statements other than a standard (unmodified) report? A. The entity omitted necessary information from its footnote disclosures that were material to the financial statements. B. The financial statements present fairly the financial condition, results of operations, and cash flows of the entity. C. The group auditors assumed responsibility for the work of component auditors in the audit of group financial statements. D. As the result of a scope limitation, auditors performed alternative procedures to satisfy themselves as to the fairness of the account balance.

A. The entity omitted necessary information from its footnote disclosures that were material to the financial statements.

In each of the circumstances listed below, indicate, by appropriate letter, which of the following types of opinions should be rendered on the entity's financial statements? Emphasis of a matter, no GAAP departure. A. Unmodified B. Qualified C. Adverse D. Disclaimer

A. Unmodified

In each of the circumstances listed below, indicate, by appropriate letter, which of the following types of opinions should be rendered on the entity's financial statements? Going-concern uncertainties that may have a material (but not pervasive) effect on the financial statements. A. Unmodified B. Qualified C. Adverse D. Disclaimer

A. Unmodified

The auditors determined that the entity is suffering financial difficulty and its going-concern status is seriously in doubt. Assuming that the entity adequately disclosed this matter in the financial statements, the auditors must choose between which of the following auditors' report alternatives? A. Unmodified opinion with a reference to going-concern or disclaimer of opinion. B. Qualified opinion or adverse opinion. C. Standard (unmodified) report or a disclaimer of opinion. D. Standard (unmodified) report or adverse opinion.

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

After completing a financial statement audit, the auditor needs to assess the situation to determine the proper type of report to issue. Expressing an independent opinion on the fairness of financial statements is an attestation service most frequently provided by auditors. The opinion is expressed in the auditors' report. CONCEPT REVIEW: Audit reports can be unmodified or modified. A report with an unmodified opinion may be a "standard report" or can include an emphasis-of-matter paragraph. A modified report can have an extra explanatory paragraph in connection with a qualified opinion, adverse opinion, or disclaimer of opinion. Auditors have doubt about a company's ability to continue as a going concern A. Unqualified Opinion with an Emphasis-of-Matter Paragraph B. Unmodified Opinion C. Adverse Opinion D. Disclaimer of Opinion

A. Unqualified Opinion with an Emphasis-of-Matter Paragraph

If management fails to provide adequate justification for a change from one generally accepted accounting principle to another, the auditors should A. add an additional paragraph and express a qualified or an adverse opinion on the entity's financial statements for lack of conformity with generally accepted accounting principles. B. disclaim an opinion on the entity's financial statements because of uncertainty. C. disclose the matter in an additional paragraph but not modify the opinion paragraph on the entity's financial statements. D. neither modify the opinion on the entity's financial statements nor disclose the matter because both principles are generally accepted accounting principles.

A. add an additional paragraph and express a qualified or an adverse opinion on the entity's financial statements for lack of conformity with generally accepted accounting principles.

After completing a financial statement audit, the auditor needs to assess the situation to determine the proper type of report to issue. Expressing an independent opinion on the fairness of financial statements is an attestation service most frequently provided by auditors. The opinion is expressed in the auditors' report. CONCEPT REVIEW: Audit reports can be unmodified or modified. A report with an unmodified opinion may be a "standard report" or can include an emphasis-of-matter paragraph. A modified report can have an extra explanatory paragraph in connection with a qualified opinion, adverse opinion, or disclaimer of opinion. A(n) _____ opinion is appropriate if a material misstatement is considered pervasive. A. adverse B. modified C. qualified D. unmodified E. unqualified

A. adverse

When issuing financial statements and their related opinion, the auditor needs to assess the situation to determine the proper type of report to issue. Auditors express an unmodified opinion when they are able to obtain sufficient and appropriate audit evidence that the financial statements as a whole are free of material misstatement. Under certain circumstances, however, auditors may add an emphasis-of-matter paragraph that refers to a matter appropriately presented. CONCEPT REVIEW: The emphasis-of-matter paragraph follows the opinion paragraph and states that the auditor's opinion is not modified, but that the matter is to be emphasized. Auditors may add an emphasis-of-matter paragraph that refers to a matter that is _________ presented or disclosed. A. appropriately B. incorrectly C. misleadingly D. unfairly E. wrongly

A. appropriately

When an entity will not permit inquiry of outside legal counsel, the auditors' report on the entity's financial statements will ordinarily contain a(n) A. disclaimer of opinion. B. qualified opinion referencing a departure from generally accepted accounting principles. C. unmodified opinion with an additional paragraph. D. adverse opinion.

A. disclaimer of opinion.

When issuing financial statements and their related opinion, the auditor needs to assess the situation to determine the proper type of report to issue. Auditors express an unmodified opinion when they are able to obtain sufficient and appropriate audit evidence that the financial statements as a whole are free of material misstatement. Under certain circumstances, however, auditors may add an emphasis-of-matter paragraph that refers to a matter appropriately presented. CONCEPT REVIEW: The emphasis-of-matter paragraph follows the opinion paragraph and states that the auditor's opinion is not modified, but that the matter is to be emphasized. If substantial doubt about a going concern exists, an ______ paragraph is the most common resolution. A. emphasis-of-matter B. explanatory C. inappropriate D. incorrect E. unqualified

A. emphasis-of-matter

Oftentimes, especially in challenging economic times, companies may not have positive financial results. The professional standards require that auditors evaluate whether there is substantial doubt about the company's ability to continue as a going concern for a reasonable period of time--a year from the balance sheet date. CONCEPT REVIEW: Tremendous judgment is involved in this phase of the audit. It should be noted that while auditors are not required to perform procedures to test the going concern assumption, they must evaluate the assumption in relation to the results of the audit procedures performed relative to the other components of the audit. When items are identified that affect the going concern assumption, auditors must gather ________. A. evidence B. funding C. ideas D. intent E. interest

A. evidence

Auditors who are reporting on financial statements that contain a material departure from generally accepted accounting principles should include an additional paragraph and A. express a qualified or adverse opinion. B. not modify the opinion paragraph as long as the departure is adequately disclosed in a footnote. C. disclaim an opinion on the financial statements. D. express a qualified opinion or disclaimer of opinion.

A. express a qualified or adverse opinion.

When issuing financial statements and their related opinion, the auditor needs to assess the situation to determine the proper type of report to issue. Auditors express an unmodified opinion when they are able to obtain sufficient and appropriate audit evidence that the financial statements as a whole are free of material misstatement. Under certain circumstances, however, auditors may add an emphasis-of-matter paragraph that refers to a matter appropriately presented. CONCEPT REVIEW: The emphasis-of-matter paragraph follows the opinion paragraph and states that the auditor's opinion is not modified, but that the matter is to be emphasized. An emphasis-of-matter paragraph always _______ the opinion paragraph. A. follows B. includes C. overlaps D. precedes E. replaces

A. follows

The issuance of a disclaimer of opinion generally indicates A. the auditors cannot form an opinion on the fairness of presentation of the financial statements as a whole. B. the auditors have some uncertainties, but these uncertainties are not so material that they cannot form an opinion on the fairness of presentation of the financial statements as a whole. C. the auditors have observed a departure from generally accepted accounting principles but the departure is not of sufficient materiality to justify a qualified opinion. D. the auditors have observed a departure from generally accepted accounting principles that is so material and pervasive that a qualified opinion is not justified.

A. the auditors cannot form an opinion on the fairness of presentation of the financial statements as a whole.

Green, CPA, was engaged to audit the financial statements of Essex Co. after its fiscal year had ended. The timing of Green's appointment and the start of fieldwork made confirmation of accounts receivable by direct communication with the customers not feasible. However, Green applied other procedures and was satisfied as to the reasonableness of the account balances. Green's auditors' report most likely contained a(n) A. unmodified opinion. B. unmodified opinion with an emphasis-of-matter paragraph. C. qualified opinion due to a scope limitation. D. qualified opinion due to a departure from generally accepted auditing standards.

A. unmodified opinion.

Holmes & Smith, LLP, were engaged to audit the financial statements of Sodolak Reality for the year ended December 31. During the engagement, Sodolak filed a lawsuit against Holmes & Smith, LLP. What effect, if any, will this lawsuit have on the auditors' report? A. The report should be modified to include an emphasis-of-matter paragraph describing the pending litigation. B. A disclaimer of opinion should be issued because the auditors' independence is impaired. C. The litigation will not have any impact on the report or auditors' independence unless Holmes & Smith are found guilty. D. A qualified or adverse opinion should be issued depending on the severity of the lawsuit.

B. A disclaimer of opinion should be issued because the auditors' independence is impaired.

When auditors wish to issue an unmodified opinion but highlight that the entity changed its method of accounting for software development costs, they would most appropriately identify the change in accounting method in which of the following? A. The introductory paragraph. B. An emphasis-of-matter paragraph. C. The opinion paragraph. D. An other-matter paragraph.

B. An emphasis-of-matter paragraph.

In a standard (unmodified) report, which of the following paragraphs or sections would indicate that auditors conducted their audits in accordance with generally accepted auditing standards? A. Introductory paragraph. B. Auditor's Responsibility section. C. Opinion paragraph. D. Emphasis-of-matter paragraph.

B. Auditor's Responsibility section.

What is the auditors' responsibility for reporting on other information accompanying financial statements? A. Because this information is not a fundamental part of the financial statements, the auditors have no reporting responsibility with respect to this information. B. Auditors are required to report on other information only if it is misstated or inconsistent with the financial statements. C. Auditors are required to provide reasonable assurance with respect to whether the other information is presented in accordance with generally accepted accounting principles. D. Auditors are required to express an opinion on whether the other information is presented in accordance with generally accepted accounting principles.

B. Auditors are required to report on other information only if it is misstated or inconsistent with the financial statements.

For each of the sentences or phrases below, indicate, by letter, in which section of the standard (unmodified) report on the entity's financial statements the sentence or phrase would appear. Management is responsible for the preparation and fair presentation of these financial statements... A. Introductory paragraph B. Management's Responsibility section C. Auditor's Responsibility section D. Opinion paragraph

B. Management's Responsibility section

In each of the circumstances listed below, indicate, by appropriate letter, which of the following types of opinions should be rendered on the entity's financial statements? Departure from generally accepted accounting principles that is material but not pervasive. A. Unmodified B. Qualified C. Adverse D. Disclaimer

B. Qualified

In each of the circumstances listed below, indicate, by appropriate letter, which of the following types of opinions should be rendered on the entity's financial statements? Material, but not pervasive, scope limitation. A. Unmodified B. Qualified C. Adverse D. Disclaimer

B. Qualified

Auditors found that the entity has not capitalized a material amount of leases in the financial statements. When considering the materiality of this departure from GAAP, the auditors would choose between which reporting options? A. Unmodified opinion or disclaimer of opinion. B. Qualified opinion or adverse opinion. C. Unmodified opinion or qualified opinion. D. Unmodified opinion with an emphasis-of-matter paragraph or an adverse opinion.

B. Qualified opinion or adverse opinion.

Various Reporting Situations. Assume that the auditors encountered the following separate situations when deciding on the report to issue for the current-year financial statements. (If the kind of opinion depends on the reason for the scope limitation (if applicable), the degree of materiality, and/or the pervasiveness of the matter discussed, then choose an answer choice that encompasses the two possible opinion types.) The auditors decided that sufficient appropriate evidence could not be obtained to complete the audit of significant investments the entity held in a foreign entity. A. Qualified or adverse B. Qualified or disclaimer of opinion C. Unmodified

B. Qualified or disclaimer of opinion

Various Reporting Situations. Assume that the auditors encountered the following separate situations when deciding on the report to issue for the current-year financial statements. (If the kind of opinion depends on the reason for the scope limitation (if applicable), the degree of materiality, and/or the pervasiveness of the matter discussed, then choose an answer choice that encompasses the two possible opinion types.) The entity hired the auditors after taking inventory on December 31. The accounting records and other evidence are not reliable enough to enable the auditors to have sufficient evidence about the proper inventory amount. A. Qualified or adverse B. Qualified or disclaimer of opinion C. Unmodified

B. Qualified or disclaimer of opinion

After completing a financial statement audit, the auditor needs to assess the situation to determine the proper type of report to issue. Expressing an independent opinion on the fairness of financial statements is an attestation service most frequently provided by auditors. The opinion is expressed in the auditors' report. CONCEPT REVIEW: Audit reports can be unmodified or modified. A report with an unmodified opinion may be a "standard report" or can include an emphasis-of-matter paragraph. A modified report can have an extra explanatory paragraph in connection with a qualified opinion, adverse opinion, or disclaimer of opinion. Auditors have obtained sufficiently appropriate evidence to conclude that the financial statements are not materially misstated A. Unqualified Opinion with an Emphasis-of-Matter Paragraph B. Unmodified Opinion C. Adverse Opinion D. Disclaimer of Opinion

B. Unmodified Opinion

Which of the following reporting options would auditors use if the entity changed the estimated lives of its property, plant and equipment and accounted for the change correctly? A. Qualified opinion. B. Unmodified opinion. C. Unmodified opinion with an emphasis-of-matter paragraph. D. Disclaimer of opinion.

B. Unmodified opinion.

Auditors will issue an adverse opinion when A. a severe scope limitation has been imposed by the entity. B. a violation of generally accepted accounting principles is sufficiently material and pervasive that a qualified opinion is not justified. C. a qualified opinion cannot be rendered because the auditors lack independence. D. the entity's ability to continue as a going concern is subject to substantial doubt.

B. a violation of generally accepted accounting principles is sufficiently material and pervasive that a qualified opinion is not justified.

A report that acknowledges reliance on the reports of component auditors is a type of report modification known as a(n) A. qualification. B. division of responsibility. C. expansion of scope. D. scope limitations.

B. division of responsibility.

After completing a financial statement audit, the auditor needs to assess the situation to determine the proper type of report to issue. Expressing an independent opinion on the fairness of financial statements is an attestation service most frequently provided by auditors. The opinion is expressed in the auditors' report. CONCEPT REVIEW: Audit reports can be unmodified or modified. A report with an unmodified opinion may be a "standard report" or can include an emphasis-of-matter paragraph. A modified report can have an extra explanatory paragraph in connection with a qualified opinion, adverse opinion, or disclaimer of opinion. When there is significant doubt as to the ability to continue as a going concern, a(n) _________ paragraph may be added. A. disclaimed B. emphasis-of-matter C. modified D. qualified E. unqualified

B. emphasis-of-matter

When updating the report on prior-years' financial statements presented in comparative form, the auditors' responsibility for the prior-years' financial statements is A. limited to the previously issued report date. B. extended to the date of the updated audit report. C. limited to 30 days after the date of the prior years' financial statements. D. extended to the updated report date only if information comes to the auditors' attention requiring modification of the previously expressed opinion.

B. extended to the date of the updated audit report.

The auditors' report on the entity's financial statements included an additional paragraph disclosing a difference of opinion between the auditors and the entity for which the auditors believed an adjustment to the financial statements should be made. The opinion paragraph of the auditors' report should express a(n) A. unmodified opinion. B. qualified opinion citing a departure from generally accepted accounting principles. C. qualified opinion citing a scope limitation and lack of specific evidence. D. disclaimer of opinion.

B. qualified opinion citing a departure from generally accepted accounting principles.

The auditors conclude that an entity's illegal act, which has a material effect on the financial statements, has not been properly accounted for or disclosed. Depending on the overall materiality and pervasiveness of the effect of this illegal act on the financial statements, the auditors should express either a(n) A. adverse opinion or a disclaimer of opinion. B. qualified opinion or an adverse opinion. C. disclaimer of opinion or an unmodified opinion with a separate emphasis-of-matter paragraph. D. unmodified opinion with a separate emphasis-of-matter paragraph or a qualified opinion.

B. qualified opinion or an adverse opinion.

Situations in which auditors provide additional copies of a previous issued report or grant entities permission to use a previously issued report in a document containing financial statements after its original date are known as A. additional use reports. B. reissued reports. C. subsequent use reports. D. updated reports.

B. reissued reports.

Which of the following phrases would auditors most likely include in their report when expressing a qualified opinion on the entity's financial statements because of inadequate disclosure? A. "Subject to the departure from generally accepted accounting principles, as described above." B. "With the foregoing explanation of these omitted disclosures." C. "Except for the omission of the information discussed in the preceding paragraph." D. "Does not present fairly in all material respects."

C. "Except for the omission of the information discussed in the preceding paragraph."

Which of the following is not included in the Auditor's Responsibility section of the standard (unmodified) report on the entity's financial statements? A. The fact that an audit includes assessing the accounting policies used by the entity. B. A statement that the audit was conducted in accordance with generally accepted auditing standards. C. A conclusion that the financial statements are in accordance with GAAP. D. The fact that the auditors performed the audit to obtain audit evidence about the amounts and disclosures in the financial statements.

C. A conclusion that the financial statements are in accordance with GAAP.

In each of the circumstances listed below, indicate, by appropriate letter, which of the following types of opinions should be rendered on the entity's financial statements? Material and pervasive departure from GAAP. A. Unmodified B. Qualified C. Adverse D. Disclaimer

C. Adverse

After completing a financial statement audit, the auditor needs to assess the situation to determine the proper type of report to issue. Expressing an independent opinion on the fairness of financial statements is an attestation service most frequently provided by auditors. The opinion is expressed in the auditors' report. CONCEPT REVIEW: Audit reports can be unmodified or modified. A report with an unmodified opinion may be a "standard report" or can include an emphasis-of-matter paragraph. A modified report can have an extra explanatory paragraph in connection with a qualified opinion, adverse opinion, or disclaimer of opinion. A material misstatement is considered pervasive A. Unqualified Opinion with an Emphasis-of-Matter Paragraph B. Unmodified Opinion C. Adverse Opinion D. Disclaimer of Opinion

C. Adverse Opinion

After completing a financial statement audit, the auditor needs to assess the situation to determine the proper type of report to issue. Expressing an independent opinion on the fairness of financial statements is an attestation service most frequently provided by auditors. The opinion is expressed in the auditors' report. CONCEPT REVIEW: Audit reports can be unmodified or modified. A report with an unmodified opinion may be a "standard report" or can include an emphasis-of-matter paragraph. A modified report can have an extra explanatory paragraph in connection with a qualified opinion, adverse opinion, or disclaimer of opinion. The client has elected to not follow GAAP A. Unqualified Opinion with an Emphasis-of-Matter Paragraph B. Unmodified Opinion C. Adverse Opinion D. Disclaimer of Opinion

C. Adverse Opinion

In which of the following should an auditors' report refer to the lack of consistency when there is a change in accounting principle that is significant? A. The Auditor's Responsibility section. B. The opinion paragraph. C. An emphasis-of-matter paragraph following the opinion paragraph. D. An emphasis-of-matter paragraph before the opinion paragraph.

C. An emphasis-of-matter paragraph following the opinion paragraph.

For each of the sentences or phrases below, indicate, by letter, in which section of the standard (unmodified) report on the entity's financial statements the sentence or phrase would appear. Our responsibility is to express an opinion on these financial statements based on our audits. A. Introductory paragraph B. Management's Responsibility section C. Auditor's Responsibility section D. Opinion paragraph

C. Auditor's Responsibility section

For each of the sentences or phrases below, indicate, by letter, in which section of the standard (unmodified) report on the entity's financial statements the sentence or phrase would appear. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. A. Introductory paragraph B. Management's Responsibility section C. Auditor's Responsibility section D. Opinion paragraph

C. Auditor's Responsibility section

When component auditors are involved in the audit of group financial statements, the group auditors may issue a report that A. Does not consider or evaluate the component auditors' work but expresses an unmodified opinion in a standard report. B. Names the component auditors, describes their work, and presents only the group auditors' report. C. Refers to the component auditors, describes the extent of the component auditors' work, and expresses an unmodified opinion. D. Places primary responsibility for the reporting on the component auditors.

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

Which of the following would not be communicated to users in the auditors' report on an entity's financial statements and related disclosures? A. Whether the financial statements are presented in accordance with GAAP, or another applicable financial reporting framework. B. Unusual aspects of the audit examination, such as the involvement of component auditors in the audit of group financial statements. C. Specific details regarding the audit examination, such as the materiality threshold used to identify material misstatements. D. Other matters affecting the client, such as substantial doubt about the entity's ability to continue as a going concern.

C. Specific details regarding the audit examination, such as the materiality threshold used to identify material misstatements.

Which of the following paragraphs or sections of the group auditors' report is modified to identify the extent of component auditor involvement in the audit of group financial statements? A. The introductory paragraph. B. The Management's Responsibility section. C. The Auditor's Responsibility section. D. The opinion paragraph.

C. The Auditor's Responsibility section.

Various Reporting Situations. Assume that the auditors encountered the following separate situations when deciding on the report to issue for the current-year financial statements. (If the kind of opinion depends on the reason for the scope limitation (if applicable), the degree of materiality, and/or the pervasiveness of the matter discussed, then choose an answer choice that encompasses the two possible opinion types.) Because the entity has experienced significant operating losses and has had to obtain waivers of debt payment requirements from its lenders, the auditors decide that there is substantial doubt that the entity can continue as a going concern. The entity has fully described all problems in a note in the financial statements and the auditors believe that, while material, the uncertainty is not serious enough to warrant a disclaimer of opinion. A. Qualified or adverse B. Qualified or disclaimer of opinion C. Unmodified

C. Unmodified

Various Reporting Situations. Assume that the auditors encountered the following separate situations when deciding on the report to issue for the current-year financial statements. (If the kind of opinion depends on the reason for the scope limitation (if applicable), the degree of materiality, and/or the pervasiveness of the matter discussed, then choose an answer choice that encompasses the two possible opinion types.) The FASB requires the energy company to present supplementary oil and gas reserve information outside the basic financial statements. The auditors find that this information, which is not required as a part of the basic financial statements, has been omitted. A. Qualified or adverse B. Qualified or disclaimer of opinion C. Unmodified

C. Unmodified

Various Reporting Situations. Assume that the auditors encountered the following separate situations when deciding on the report to issue for the current-year financial statements. (If the kind of opinion depends on the reason for the scope limitation (if applicable), the degree of materiality, and/or the pervasiveness of the matter discussed, then choose an answer choice that encompasses the two possible opinion types.) The auditors are group auditors of the parent company, but they reviewed the component auditors' work and reputation and decide not to take responsibility for the work of the component auditors on three subsidiary companies included in the consolidated financial statements. The component auditors' work amounts to 32 percent of the consolidated assets and 39 percent of the consolidated revenues. A. Qualified or adverse B. Qualified or disclaimer of opinion C. Unmodified

C. Unmodified

Various Reporting Situations. Assume that the auditors encountered the following separate situations when deciding on the report to issue for the current-year financial statements. (If the kind of opinion depends on the reason for the scope limitation (if applicable), the degree of materiality, and/or the pervasiveness of the matter discussed, then choose an answer choice that encompasses the two possible opinion types.) The entity changed its depreciation method from units of production to straight line, and its auditors believe the straight-line method is the more appropriate method in the circumstances. The change, fully explained in the notes to the financial statements, has a material effect on the year-to-year comparability of the comparative financial statements. A. Qualified or adverse B. Qualified or disclaimer of opinion C. Unmodified

C. Unmodified

After completing a financial statement audit, the auditor needs to assess the situation to determine the proper type of report to issue. Expressing an independent opinion on the fairness of financial statements is an attestation service most frequently provided by auditors. The opinion is expressed in the auditors' report. CONCEPT REVIEW: Audit reports can be unmodified or modified. A report with an unmodified opinion may be a "standard report" or can include an emphasis-of-matter paragraph. A modified report can have an extra explanatory paragraph in connection with a qualified opinion, adverse opinion, or disclaimer of opinion. Auditors _____ an opinion when they are unable to form an opinion. A. agree B. concur C. disclaim D. qualify E. withdraw

C. disclaim

Oftentimes, especially in challenging economic times, companies may not have positive financial results. The professional standards require that auditors evaluate whether there is substantial doubt about the company's ability to continue as a going concern for a reasonable period of time--a year from the balance sheet date. CONCEPT REVIEW: Tremendous judgment is involved in this phase of the audit. It should be noted that while auditors are not required to perform procedures to test the going concern assumption, they must evaluate the assumption in relation to the results of the audit procedures performed relative to the other components of the audit. In addition to an emphasis-of-matter paragraph, auditors could issue a(n) _________ in a going concern situation. A. adverse opinion B. audit report C. disclaimer D. exception E. weakness

C. disclaimer

When issuing financial statements and their related opinion, the auditor needs to assess the situation to determine the proper type of report to issue. Auditors express an unmodified opinion when they are able to obtain sufficient and appropriate audit evidence that the financial statements as a whole are free of material misstatement. Under certain circumstances, however, auditors may add an emphasis-of-matter paragraph that refers to a matter appropriately presented. CONCEPT REVIEW: The emphasis-of-matter paragraph follows the opinion paragraph and states that the auditor's opinion is not modified, but that the matter is to be emphasized. Changes in accounting estimates ______ result in an explanatory paragraph. A. always B. do C. do not D. eventually E. should

C. do not

After completing a financial statement audit, the auditor needs to assess the situation to determine the proper type of report to issue. Expressing an independent opinion on the fairness of financial statements is an attestation service most frequently provided by auditors. The opinion is expressed in the auditors' report. CONCEPT REVIEW: Audit reports can be unmodified or modified. A report with an unmodified opinion may be a "standard report" or can include an emphasis-of-matter paragraph. A modified report can have an extra explanatory paragraph in connection with a qualified opinion, adverse opinion, or disclaimer of opinion. Limitations on the scope of an audit may create a situation in which the auditors are unable to obtain sufficient ________. A. accounting B. balance sheets C. evidence D. financial statements E. paragraphs

C. evidence

When disclaiming an opinion due to a client-imposed scope limitation, auditors should describe the nature of the scope limitation in an additional paragraph and modify the A. introductory paragraph. B. introductory paragraph and Auditor's Responsibility section. C. introductory paragraph, Auditor's Responsibility section, and opinion paragraph. D. Auditor's Responsibility section and opinion paragraph.

C. introductory paragraph, Auditor's Responsibility section, and opinion paragraph.

Oftentimes, especially in challenging economic times, companies may not have positive financial results. The professional standards require that auditors evaluate whether there is substantial doubt about the company's ability to continue as a going concern for a reasonable period of time--a year from the balance sheet date. CONCEPT REVIEW: Tremendous judgment is involved in this phase of the audit. It should be noted that while auditors are not required to perform procedures to test the going concern assumption, they must evaluate the assumption in relation to the results of the audit procedures performed relative to the other components of the audit. Auditors are _____ required to perform procedures specifically designed to test the going concern assumption. A. always B. generally C. not D. rarely E. sometimes

C. not

If the auditors obtains sufficient appropriate evidence on the entity's accounts receivable balance by alternative procedures because it is impracticable to confirm accounts receivable, the opinion on the entity's financial statements should be unmodified and would A. disclose the fact that alternative procedures were used due to client-imposed scope limitation. B. disclose in the opinion paragraph that confirmation of accounts receivable was impracticable. C. not mention the alternative procedures. D. include an other-matter paragraph that discloses the performance of alternative procedures.

C. not mention the alternative procedures.

When there has been a change in accounting principles, but the effect of the change on the comparability of the financial statements is not material, the auditors should A. refer to the change in an emphasis-of-matter paragraph. B. explicitly concur that the change is preferred. C. not refer to consistency in the report. D. refer to the change in the opinion paragraph.

C. not refer to consistency in the report.

Oftentimes, especially in challenging economic times, companies may not have positive financial results. The professional standards require that auditors evaluate whether there is substantial doubt about the company's ability to continue as a going concern for a reasonable period of time--a year from the balance sheet date. CONCEPT REVIEW: Tremendous judgment is involved in this phase of the audit. It should be noted that while auditors are not required to perform procedures to test the going concern assumption, they must evaluate the assumption in relation to the results of the audit procedures performed relative to the other components of the audit. An emphasis-of-matter paragraph always follows the ______ paragraph. A. first B. introduction C. opinion D. scope E. second

C. opinion

When other information is presented in a document with audited financial statements, the auditors' report should A. state that the auditor read the other information for inconsistencies and misstatements with the financial statements and identified no discrepancies. B. provide limited assurance as to whether the other information is presented in accordance with generally accepted accounting principles. C. reference the other information only if inconsistencies or material misstatements are identified between this information and the financial statements. D. be expanded to express an opinion that the other information is consistent with the financial statements and not materially misstated.

C. reference the other information only if inconsistencies or material misstatements are identified between this information and the financial statements.

A client has capitalizable leases but refuses to capitalize them in the financial statements. Which of the following reporting options does an auditor have if the amounts pervasively distort the financial statements? A. Qualified opinion. B. Unmodified opinion. C. Disclaimer of opinion. D. Adverse opinion.

D. Adverse opinion.

Which of the following is not included in the standard (unmodified) report on the financial statements? A. An opinion that the financial statements present financial position in accordance with GAAP. B. An identification of the financial statements that were audited. C. A general description of an audit. D. An emphasis-of-matter paragraph commenting on the effect of economic conditions on the entity.

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

Which of the following is not an appropriate reporting option when component auditors are involved in the audit of group financial statements, assuming that the component auditors' work did not identify any issues affecting the group auditors' report? A. Issue a standard (unmodified) report that does not reference any involvement by the component auditors. B. Identify the component auditors by name and present their report along with the group auditors' report. C. Refer to the component auditors' work and disclose the extent of their work in the group auditors' report. D. Disclaim an opinion on the portion of the financial statements examined by the component auditors.

D. Disclaim an opinion on the portion of the financial statements examined by the component auditors.

After completing a financial statement audit, the auditor needs to assess the situation to determine the proper type of report to issue. Expressing an independent opinion on the fairness of financial statements is an attestation service most frequently provided by auditors. The opinion is expressed in the auditors' report. CONCEPT REVIEW: Audit reports can be unmodified or modified. A report with an unmodified opinion may be a "standard report" or can include an emphasis-of-matter paragraph. A modified report can have an extra explanatory paragraph in connection with a qualified opinion, adverse opinion, or disclaimer of opinion. 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 A. Unqualified Opinion with an Emphasis-of-Matter Paragraph B. Unmodified Opinion C. Adverse Opinion D. Disclaimer of Opinion

D. Disclaimer of Opinion

For each of the sentences or phrases below, indicate, by letter, in which section of the standard (unmodified) report on the entity's financial statements the sentence or phrase would appear. The financial statements referred to above present fairly, in all material respects, the financial position of... A. Introductory paragraph B. Management's Responsibility section C. Auditor's Responsibility section D. Opinion paragraph

D. Opinion paragraph

An auditor concludes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. The entity's financial statements adequately disclose its financial difficulties. Under these circumstances, the auditor's report is required to include an emphasis-of-matter paragraph that specifically uses the phrase(s). "Except for the effects of such adjustments" A. Yes B. Yes C. No D. No "Possible discontinuance of the entity's operations" A. Yes B. No C. Yes D. No A. Option A B. Option B C. Option C D. Option D

D. Option D

When qualifying an opinion because of an insufficiency of audit evidence, an auditor should refer to the situation in the Auditor's Responsibility section A. Yes B. Yes C. No D. No Notes to the financial statements A. Yes B. No C. Yes D. No A. Option A B. Option B C. Option C D. Option D

D. Option D

Management determined it was probable that a pending litigation claim would result in a material loss. The loss was disclosed in the footnotes to the financial statements but was not accrued in the income statement. If the auditors believe an accrual should be made, what type of report should be issued? A. Standard (unmodified) report. B. Unmodified opinion with an emphasis-of-matter paragraph. C. Qualified opinion based on a circumstance-imposed scope limitation. D. Qualified or adverse opinion based on a departure from GAAP.

D. Qualified or adverse opinion based on a departure from GAAP.

Under which of the following conditions can a disclaimer of opinion never be issued? A. The auditors own stock in the entity. B. The entity's going-concern problems are highly material and pervasive. C. The entity does not allow the auditors access to evidence about important accounts. D. The auditors have determined that the entity uses the NIFO (next-in, first-out) inventory costing method.

D. The auditors have determined that the entity uses the NIFO (next-in, first-out) inventory costing method.

In which of the following circumstances would a qualified opinion not be appropriate? A. A scope limitation prevents the auditors from completing an important auditing procedure. B. The entity has failed to properly disclose going-concern uncertainties. C. An accounting principle at variance with generally accepted accounting principles is used. D. The auditors lack independence with respect to the audited entity.

D. The auditors lack independence with respect to the audited entity.

Which of the following best describes the auditors' responsibility when financial statements are presented in comparative format? A. The auditors' report must only refer to the current year's financial statements. B. The auditors' report must only refer to the prior years' financial statements if they were audited by the current auditor. C. The auditors' report must only refer to the prior years' financial statements if they were audited by either the current auditors or predecessor auditors. D. The auditors' report must refer to all financial statements presented in comparative form, regardless of whether they have been audited by the current auditors or predecessor auditors.

D. The auditors' report must refer to all financial statements presented in comparative form, regardless of whether they have been audited by the current auditors or predecessor auditors.

If financial statements contain an immaterial departure from accounting principles, the auditors can render a(n) A. "Subject to" opinion. B. Qualified opinion. C. Unmodified opinion with an additional paragraph. D. Unmodified opinion.

D. Unmodified opinion.

Auditors are required to reference consistency in their report when there are changes in A. accounting estimates. B. the format of the Statement of Cash Flows. C. the classification of financial statement amounts. D. accounting principles.

D. accounting principles.

Auditors most likely would issue a disclaimer of opinion on the entity's financial statements because of A. inadequate disclosure of material information. B. the omission of the Statement of Cash Flows. C. a material departure from generally accepted accounting principles. D. management's refusal to furnish written representations.

D. management's refusal to furnish written representations.

After completing a financial statement audit, the auditor needs to assess the situation to determine the proper type of report to issue. Expressing an independent opinion on the fairness of financial statements is an attestation service most frequently provided by auditors. The opinion is expressed in the auditors' report. CONCEPT REVIEW: Audit reports can be unmodified or modified. A report with an unmodified opinion may be a "standard report" or can include an emphasis-of-matter paragraph. A modified report can have an extra explanatory paragraph in connection with a qualified opinion, adverse opinion, or disclaimer of opinion. Qualified opinions are issued when the financial statements are ________ misstated. A. always B. consistently C. constantly D. materially E. not

D. materially

When auditors qualify their opinion on the entity's financial statements because of inadequate disclosure, the auditors should describe the nature of the omission in an additional paragraph and modify A. the introductory paragraph and Auditor's Responsibility sections. B. the introductory paragraph only. C. the Auditor's Responsibility section only. D. neither the introductory paragraph nor Auditor's Responsibility section.

D. neither the introductory paragraph nor Auditor's Responsibility section.

Oftentimes, especially in challenging economic times, companies may not have positive financial results. The professional standards require that auditors evaluate whether there is substantial doubt about the company's ability to continue as a going concern for a reasonable period of time--a year from the balance sheet date. CONCEPT REVIEW: Tremendous judgment is involved in this phase of the audit. It should be noted that while auditors are not required to perform procedures to test the going concern assumption, they must evaluate the assumption in relation to the results of the audit procedures performed relative to the other components of the audit. A going concern evaluation should include evaluation of ________ from the balance sheet date. A. one day B. one month C. one week D. one year E. two years

D. one year

When financial statements contain a departure from GAAP, the auditors should explain the unusual circumstances in a separate paragraph and express an opinion that is A. unmodified. B. qualified. C. adverse. D. qualified or adverse, depending on the overall materiality and pervasiveness of the GAAP departure.

D. qualified or adverse, depending on the overall materiality and pervasiveness of the GAAP departure.

When audited financial statements are presented in a document containing other information, the auditors should A. perform inquiry and analytical procedures to ascertain whether the other information is reasonable. B. add an emphasis-of-matter paragraph to the auditors' report without modifying the opinion on the financial statements. C. perform the appropriate substantive procedures to corroborate the other information. D. read the other information to determine that it is consistent with the audited financial statements.

D. read the other information to determine that it is consistent with the audited financial statements.

"As described in Note 5 to the financial statements, General Express changed its statistical method of computing product warranty expense for the year ended December 31, 2017..." is an illustration of a A. consistency change requiring a qualified opinion. B. scope limitation. C. departure from generally accepted accounting principles. D. report with a consistency modification.

D. report with a consistency modification.

When issuing financial statements and their related opinion, the auditor needs to assess the situation to determine the proper type of report to issue. Auditors express an unmodified opinion when they are able to obtain sufficient and appropriate audit evidence that the financial statements as a whole are free of material misstatement. Under certain circumstances, however, auditors may add an emphasis-of-matter paragraph that refers to a matter appropriately presented. CONCEPT REVIEW: The emphasis-of-matter paragraph follows the opinion paragraph and states that the auditor's opinion is not modified, but that the matter is to be emphasized. A going concern is to be evaluated for a period not to exceed _________ beyond the date of the financial statements. A. one day B. one month C. one period D. one quarter E. one year

E. one year