Chapter 17 Auditing assurance
A client changed from the method it uses to calculate post employment 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
Unmodified—standard.
A client changed the salvage value of certain assets from 5 percent to 10 percent of original costs. The auditor concurs with the change
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.)
Unmodified—standard.
A client uses the specific identification method of accounting for valuable items in inventory, and LIFO for less valuable items. The auditors concurs that this is a reasonable practice
Unmodified—standard.
A company has not followed generally accepted accounting principles in the recording of its leases. The amounts involved are immaterial
Unmodified—standard.
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 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 ownerd 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.
Which of the following ordinarily involves the addition of an emphasis-of-matter paragraph to an audit report?
A consistency modification.
Which of the following is least likely to result in inclusion of an emphasis-of-matter paragraph in an audit report?
A decision not to confirm accounts receivable.
Due to recurring operation losses and working capital deficiencies, and auditor has substantial doubt about an entitiy'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 th auditor believes the omission fundamentally affects the users' understanding of the financial statements
Adverse.
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. .
An improper type of reporting.
The auditors' report should be dated as of the date the:
Auditors have accumulated sufficient evidence
An audit report for a public client indicates that the financial statements were prepared in conformity with:
Generally accepted accounting principles (United States).
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
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
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.
Qualified or Disclaimer
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 does not concur with the change.
Qualified or adverse.
A client's financial statements follow GAAP except that they do not include a note on a significant related party transaction
Qualified or adverse.
A company has not followed generally accepted accounting principles in the recording of its leases
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
Qualified or adverse.
In auditing the long-term investments account of a new client, and 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 $2,000,000 estimate in that note.
Qualified or adverse.
An auditor discovered that a client made illegal polital 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 anote to the financial statements to describe the illegal payments and has stated that the amounts of the payments are not determinable.
Qualified or disclaimer.
An audit report for a public client indicates that the financial statements were prepared in conformity with:
Standards of the Public Company Accounting Oversight Board (United States)
An audit report for a public client indicates that the audit was performed in accordance with:
Standards of the Public Company Accounting Oversight Board (United States).
London Company has material investments in stocks of subsidiary companies. Stocks of the subsidiary companyies are not actively traded in the market, and the CPA firm's engagment does not extend to any subsidiary company. The CPA firm is able to determine that all investments are carried at original costs, but has no real idea of market value. Although the difference between cost and market could be material, it could not have pervasive effect on the overall financial statements ** Qualified
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
A client changed the depreciation life of certain assets from 10 years to 12 years. The auditor concurs with the change
Unmodified with an emphasis-of-matter paragraph or disclaimer.
Due to recurring operating lossees and working capital deficiencies, and 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.
Unmodified with an emphasis-of-matter paragraph or disclaimer.
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.
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.
Unmodified with an emphasis-of-matter paragraph.
For each of the following brief scenarios, assume that you are reporting on a client's financial statements. Reply as to the type(s) of opinion possible for the scenario. In addition:
a. Bowles company is engaged in 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 . Draves Company owns substantial properties that have appreciated significantly in value since the date of purchase. The properties were appraised and we reported in the balance sheet of the appraisal value (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 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
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.
Qualified or disclaimer.
A client changed the depreciation 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
Qualified.
An auditor discovered that a client made illegal polital 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.
Qualified.
In auditing the long-term investments account of a new client, and 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 that matter in detail.
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.
Unmodified—standard.
A material departure from generally accepted accounting principles will result in auditor consideration of:
Whether to issue an adverse opinion rather than a qualified opinion.
