Principles of Auditing Chapter 17

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.

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. While the auditor believes that the inventory costs do approximate replacement costs, these costs do not approximate any GAAP inventory valuation method.

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 is properly stated.

Qualified or disclaimer

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

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

Unmodified-standard

Adverse Opinion

An opinion that the financial statements do not fairly present financial position, results of operations, and cash flows in conformity with GAAP. The situation occurs when the auditors believe that departures from GAAP are material and pervasive.

Disclaimer of Opinion

A form of report in which the auditors state that they do not express an opinion on the financial statements.

Qualified Opinion

A modification of the auditors' standard report, employing a clause such as except for to the limit the auditors' opinion of the financial statements. A qualified opinion indicates that except for the effects of some litigation on the scope of the audit or some departure from GAAP, the financial statements are fairly presented.

Basis for modification paragragh

A paragraph added to a report with a modified opinion that provides a description of the matter giving rise to the modification. The paragraph should be placed immediately before the opinion one and using the heading "Basis for (Qualified Disclaimer or Adverse) Opinion"

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.

A. A consistency modification.

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.

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 & pervasive.

Adverse

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.

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

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

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 or Unmodified with Emphasis-of-Matter A. Yes Yes B. Yes No C. No Yes D. No No

B. Yes No

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.

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

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 Adverse 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 or Unmodified with Emphasis-of-Matter A. Yes Yes B. Yes No C. No Yes D. No No

C. No Yes

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

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

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.

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 financial statements of undetected misstatements, if any, could be both material & pervasive.

Disclaimer

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

Other (mention them in opinion 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 misstatement is not considered pervasive.

Qualified

In auditing the long-term investments account of a new client, an auditor finds that a large contingent liability exists that is material (but not pervasive) 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.

Qualified

The auditors believe that the financial statements have been presented in conformity with GAAP, 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 it is pervasive.

Qualified

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

Standard unmodified

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

Standard unmodified

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.

Standard unmodified

An auditor reporting on group financial statements decides to take responsibility for the work of a component auditor who audited a 70% owned subsidiary and issued an unmodified opinion. The total assets and revenues of the subsidiary are 5% and 8%, respectively, of the total assets and revenues of the entity being audited.

Standard unmodified

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

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.

Unmodified with an emphasis of matter paragraph or disclaimer

Other-matter paragraph

A paragraph included in the auditors' report that is required by GAAS or is included at auditors' discretion, and that refers to a matter other than those presented or disclosed in the financial statements that, in the auditors' judgement, is relevant to users' understanding of the audit, the auditors' responsibilities, or the auditors' report.

Emphasis of Matter paragraph

A paragraph included in the auditors' report that is required by GAAS or is included at the auditors' discretion, and that refers to a matter appropriately presented or disclosed in the financial statements that, in the auditors' judgement, is of such importance that it is fundamental to users' understanding of the financial statements. (ex. not consistent with GAAP or doubt of going concern)

The auditors who wish to draw reader attention to a financial statement note disclosure on significant transactions with related parties should disclose this fact in: A. An emphasis-of-matter paragraph to the auditors' report. B. A footnote to the financial statements. C. The body of the financial statements. D. The "summary of significant accounting policies" section of the financial statements.

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

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.

In auditing the long-term investments account of a new client, an auditor finds that a large contingent liability exists that is material (but not pervasive) 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.

Unmodified-standard

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-with an emphasis of matter paragraph