Quiz 12

TRUE or FALSE: The change that the auditor agrees with from one generally accepted accounting principle to another generally accepted accounting principle that has a pervasive effect on net income usually results in an adverse opinion by the auditors

False

TRUE or FALSE: An emphasis-of-matter paragraph goes before the audit opinion paragraph in the audit report

False It goes after

TRUE or FALSE: The audit report does not typically cover the financial statement disclosures (footnotes)

False The audit report covers both the financial statements themselves as well as the accompanying footnotes

TRUE or FALSE: A public company's financial statements should be prepared following standards of the PCAOB

False The client prepares the financial statements in accordance with GAAP, auditor follows PCAOB when conducting the audit

TRUE or FALSE: When the auditors are unable to comply with generally accepted auditing standards, they should issue an opinion that is unmodified, but include an additional emphasis-of-matter paragraph in the report.

False The opinion paragraph will be modified to a qualified or adverse opinion and add a basis for modification paragraph preceding the opinion paragraph (a why paragraph)

TRUE or FALSE: A client imposed scope limitation will generally result in a disclaimer of opinion, regardless of whether sufficient appropriate audit evidence is gathered using alternative procedures.

False: Unmodified opinion may be possible if alternative procedures are available

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 GAAS 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

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

A

Which statement is correct concerning a disclaimer of opinion and an adverse opinion? a. A disclaimer of opinion indicates that the auditor has not been able to gather enough evidence to render an opinion on the financial statements, while an adverse opinion indicates that the financial statements are materially misstated. b. A disclaimer of opinion indicates that the financial statements are materially misstated, while an adverse opinion indicates that the auditor has not been able to gather enough evidence to render an opinion on the financial statements. c. The opinions are generally equivalent, except an adverse opinion includes a going concern paragraph. d. Adverse opinions indicate that the financial statements are materially misstated, while a disclaimer indicates that the financial statements are "so wrong" that no opinion can be given.

A

In which of the following conditions is an unmodified audit opinion least likely? a. The auditor believes that the client is unlikely to remain a going concern b. The auditor believes that inventory is valued following a method that is not considered GAAP c. The audit was conducted with no circumstance imposed scope limitations d. GAAP was not consistently applied from year to year

B

The auditor's 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 The audit report should be dated no earlier than when the auditors have accumulated sufficient appropriate evidence. This date is often the last day of fieldwork

A material departure from GAAP 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 are applicable to this type of exeception

C

When a company has a probable and material loss contingency, and the company has accrued the loss in the financial statements, the appropriate audit opinion is ordinarily which of the following? A. Adverse opinion b. Qualified opinion C. Standard unmodified opinion d. Unmodified opinion with an emphasis of matter paragraph

C

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? a. Either a qualified opinion or an unmodified opinion with an emphasis-of-matter paragraph b. A qualified opinion c. An unmodified opinion with an emphasis-of-matter paragraph d. Neither a qualified opinion nor an unmodified opinion with an emphasis-of-matter paragraph

C

Which of the following conditions is most likely to result in auditor consideration of issuing a going concern modification? a. A decrease in profitability as compared to the previous year. b. A loss contingency related to a lawsuit. c. Default on a loan agreement d. A material related party transaction

C

Which of the following is true regarding the notes to financial statements prepared following GAAP? a. Notes are not required, but are typically included by all companies. b. Notes are not required, since they only give additional information contained in the financial statements c. Notes are an integral part of the financial statements d. Notes are not encompassed in the auditor's opinion of the financial statements since they are supplementary information

C. Notes provide considerable information about accounting policies and principles as well as detailed information of individual line items presented on the financial statements

TRUE or FALSE: If financial statements fail to disclose a material fact, the auditors may disclose the information in an emphasis-of-matter paragraph and, depending upon materiality, issue either a qualified opinion or adverse opinion on the statements.

True Failure to disclose a material fact also fives rise to qualified or adverse opinions just like a material misstatement in amount. Note that the auditor can include an emphasis-of-matter paragraph here as well

TRUE or FALSE: An auditor should issue an unmodified audit opinion when the financial statements contain an immaterial departure from GAAP

True May have modified wording or explanation paragraph, but unqualified opinion

CPA Firm A qualifies as the group auditor. However, since Firm A did not have the resources, it hired CPA Firm B to audit a subsidiary of the client located in Bolivia. If Firm A is willing to take responsibility for the work of Firm B, which type of audit report is Firm A most likely to issue?

Unmodified - standard report Only if the CPA firm doesn't want to assume responsibility for the component audit firm will it include language about the component auditor in the opinion