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T or F: The term material may be defined as "sufficiently important to influence decisions made by reasonable users of financial statements.''

True

UM-standard report this report may be issued only when the auditors have obtained sufficient appropriate audit evidence to conclude the fin statements are not misstated and there is no need to alter the report

types of reports with unmodified opinions

When a nonpublic client elects to change accounting principles from one acceptable principle to another acceptable principle and the auditors agree the change is desirable, they should issue a report with a(n) __________ opinion.

unmodified

Auditors may add an emphasis-of-matter paragraph that refers to a matter that is _________ presented or disclosed.

Appropriately

he auditor's report contains either an expression of opinion on the financial statements, taken as a whole, or

An assertion that an opinion cannot be expressed

The auditors decide not to make reference to the report of a component auditor that audited a portion of group financial statements. What type of audit report should be used?

Unmodified - standard

A change from the completed-contract method to the percentage-of-completion method of accounting for long-term construction contracts. Should the audit report include an emphasis-of-matter paragraph on consistency?

Yes

Unmodified? Additional paragraph? A scope limitation.

No, yes

A departure from GAAP

No/Yes

A scope limitation

No/Yes

A company has not followed generally accepted accounting principles in the recording of its leases.

7. Qualified or adverse.

Group auditors need to obtain an understanding of whether __________ auditors are competent.

Component

The point should say communicated to the audit committee. (Correct or Incorrect)

Correct

Situation: Client-imposed restrictions significantly limit the scope of the auditors' procedures, and they are unable to obtain sufficient appropriate audit evidence. The possible effects on the financial statements of undetected misstatements, if any, could be both material and pervasive.

Disclaimer

Type of Report: The scope of the auditors' examination is restricted and material and pervasive.

Disclaimer

If substantial doubt about a going concern exists, an ______ paragraph is the most common resolution.

Emphasis of matter

Which of the following is least likely to result in an adverse opinion? Limitation in the scope of the audit. Uncertainty. Change in accounting principle. Related party transaction.

Limitation in the scope of the audit.

properally disclose info required by GAAP

The purpose of notes to fin statements is to

The auditors issue a qualified opinion or a(n) __________ opinion, if they consider the disclosure in the client's financial statements to be inadequate.

adverse

GAAP

in the US, fin. statements are most frequently prepared following this general purpose framework

Responsibility for the preparation and fair presentation of the financial statements rests with the __________.

management

Under which of the following circumstances would a disclaimer of opinion NOT be appropriate?

management does not provide reasonable justification for a change in the accounting system

The primary responsibility for the adequacy of disclosure in the financial statements of a publicly-held company rests with the:

management of the company.

If the auditors believe that related party transactions are not adequately described in the notes to the financial statements, they should: disclaim an opinion. qualify their opinion or issue an adverse opinion. add an emphasis-of-matter paragraph to their unmodified opinion. consider more thoroughly the client's going concern status.

qualify their opinion or issue an adverse opinion.

An auditors' opinion exception arising from a limitation on the scope of the audit should be explained in: a note to the financial statements. the auditors' report. both a note to the financial statements and the auditors' report. the mandatory adjusting entry whenever such a scope limitation occurs.

the auditors' report.

auditors have responsibility to perform procedures through that date

the date of the audit report is significant bc:

A USA nonpublic company audit report indicates that the audit was performed in accordance with "generally accepted accounting principles." T/F

False

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

1. Unmodified—standard.

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 owned 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.

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.

2. 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.

2. 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. The auditor has decided not to issue a disclaimer of opinion.

2. Unmodified with an emphasis-of-matter 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 misstatements involved are not considered pervasive.

3. Qualified.

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.

7. Qualified or adverse.

A client's financial statements follow GAAP except that they do not include a note on a significant related party transaction.

7. 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.

7. Qualified or adverse.

A lawyer who refuses to provide appropriate information for a case that has been settled creates this circumstance for the auditor. a. scope limitation b. uncertainty c. lack of opinion

An auditors' opinion exception arising from a limitation on the scope of the audit should be explained in: a. the auditors' report. b. both a note to the financial statements and the auditors' report. c. a note to the financial statements. d. the mandatory adjusting entry whenever such a scope limitation occurs.

Auditors retained after the client has taken its beginning inventory count who are unable to obtain sufficient appropriate audit evidence relating to beginning inventory should issue and unmodified opinion on the BS and this opinion on the statement of income, retained earnings, and CF: a. disclaimer of opinion b. qualified opinion c. adverse opinion

For auditors that are reporting on two periods, consistency of GAAP application should be evaluated between the current period and: a. preceding two periods b. preceding period only c. preceding five periods

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.

Match the type of circumstance with its description. a. Scope limitation b. Uncertainty 1. Audit evidence should be available for an item but it is not 2. Audit evidence for an item will become available at a future date

A - 1, B - 2

Match the form with the purpose. a. S-1 through S-11 b. 10-Q c. 10-K 1. Registration statements for companies planning to issue securities to the public 2. Annual filing of audited FS 3. Quarterly filing of financial information unaudited but reviewed by auditors

A - 1, B - 3, C - 2

The scope of the auditor's examination is restricted and the auditor is NOT ABLE to effectively apply other procedures.

A qualified opinion/ A disclaimer opinion.

The financial statements contain a departure from generally accepted accounting principles.

A qualified opinion/ An adverse opinion.

Auditors evaluate changes in accounting principles to determine if: (Select all that apply) a. Method of accounting for effect of change is in conformity with GAAP b. Management has justified the new accounting principle is preferable c. Accounting principle is consistent with the prior year d. Newly adopted principle is generally accepted

A, B, D

Modified opinions are required when there is: (Select all that apply) a. Departure from GAAP b. Component auditors that audit a subsidiary c. Scope limitation d. Change in accounting principle

A, C

For scope limitations that have a material but not pervasive effect on the FS, auditors should issue a report that includes modifications to: (Select all that apply) a. opinion paragraph b. auditor's responsibility paragraph c. management's responsibility d. additional basis for modification paragraph

A, D

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.

Ordinarily, a public company must be addressed to: Shareholders / Board of Directors A. Yes Yes B. Yes No C. No Yes D. No No

A. Yes Yes

A(n) _____ opinion is appropriate if a material misstatement is considered pervasive.

Adverse

A(n) __________ opinion states the FS are not presented in conformity with GAAP.

Adverse

This type of opinion is most appropriate for the situation in which the auditor wants to emphasize a matter not presented or disclosed in the FS. a. Unmodified opinion on group FS b. Unmodified opinion with an other-matter paragraph c. Unmodified opinion with an emphasis-of-matter paragraph d. Standard unmodified report

To evaluate consistent application of GAAP when reporting on only the current period, auditors should consider the current period under audit and: a. preceding five periods b. preceding period c. preceding two periods

Upon the advice of its auditors, Smith Company changed the method of computing depreciation from the straight-line method to an accelerated method with a material effect upon the financial statements. The auditors' report: a. must be qualified for the accounting change. b. should include an additional emphasis-of-matter paragraph highlighting the accounting change. c. should be a standard unmodified report. d. should contain modification of the opinion paragraph.

Audit reports issued under GAAS ordinarily are signed with the name of the __________.

CPA firm

Scenario: You decide not to take responsibility for the work of the component auditors 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.

Circumstance: Group Audit Type of Opinion(s): Unmodified Report Alteration: Other Alteration - No Paragraph Added

Which of the following circumstances generally results in the issuance of a report that is other than unqualified?

Circumstances have significantly limited the scope of the auditor's procedure

A note to the financial statements of the First Security Bank indicates that the company self insures itself for the first $100,000 of liability to employees, with liability insurance for the remainder. Based upon this, one would expect the auditors' report to express: a. a qualified opinion. b. a disclaimer of opinion. c. an adverse opinion. d. a standard unmodified 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.

Under which of the following set of circumstances might the auditors disclaim an opinion? A. The financial statements contain a departure from generally accepted accounting principles, the effect of which is material. B. The principal auditors decide to make reference to the report of another auditor who audited a subsidiary. C. There has been a material change between periods in the method of application of accounting principles. D. There are significant scope limitations on the audit.

D. There are significant scope limitations on the audit.

¨It is acceptable to express an unqualified opinion on one statement while expressing a qualified or adverse on the others

Different Opinions on Different Financial Statements (B/S, I/S,etc)

Auditors _____ an opinion when they are unable to form an opinion.

Disclaim

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

Form AP must be filed with the PCAOB with ___ days of the date the audit report is first included in a doc filed with the SEC.

Which of the following is a "registration statement" that is filed with the SEC by a company planning to issue securities to the public? Form S-1. Form 10-K. Form 10-Q. Form 8-K.

Form S-1.

An audit report for a public client indicates that the financial statements were prepared in conformity with:

Generally accepted accounting principles (United States) (An audit report for a public client indicates that the financial statements are presented in conformity with generally accepted accounting principles (United States). The PCAOB does not issue accounting standards.)

The title for a standard unmodified report for a nonpublic company must include the word __________ to describe the auditors relationship to the client.

Independent

When an auditor of financial statements has substantial doubt about an entity's ability to continue as a going concern, the auditor most likely would express a qualified opinion if:

Information about the entity's ability to continue as a going concern is not disclosed in the financial statements

When an auditor of financial statements has substantial doubt about an entity's ability to continue as a going concern, the auditor most likely would express a qualified or adverse opinion if: The effects of the adverse financial conditions are likely to be negative. Negative trends and recurring operating losses appear to be irreversible. Information about the entity's ability to continue as a going concern is not disclosed in the financial statements. Management has no plans to reduce or delay future expenditures.

Information about the entity's ability to continue as a going concern is not disclosed in the financial statements.

-auditors resp section - opinion section

In a shared resp report, the sections of the audit report that should be modified are the:

CPA Firm A has performed most of the audit of Consolidated Company's financial statements and qualifies as the group auditor. CPA Firm B did the remainder of the work. Firm A wishes to assume full responsibility for Firm B's work. Which of the following statements is correct? Such assumption of responsibility violates the profession's standards. In such circumstances, when appropriate requirements have been met, Firm A should issue a standard unmodified opinion on the financial statements. In such circumstances, when appropriate requirements have been met, Firm A should issue an unmodified opinion on the financial statements but should make appropriate reference to Firm B in the audit report. CPA firm A should normally qualify its audit report on the basis of the scope limitation involved when another CPA firm is involved.

In such circumstances, when appropriate requirements have been met, Firm A should issue a standard unmodified opinion on the financial statements.

The Change in Accounting Principles paragraph should include the dollar effect of the change. (Correct or Incorrect)

Incorrect

The report's title is incorrect as it should not include the word "independent." (Correct or Incorrect)

Incorrect

The sentence should state generally accepted auditing standards of the PCAOB. (Correct or Incorrect)

Incorrect

This disclosure also must include the name of the engagement partner. (Correct or Incorrect)

Incorrect

When critical matters exist, the two related paragraphs (this and the following paragraph) should immediately follow the opinion paragraph. (Correct or Incorrect)

Incorrect

Which of the following procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern? Inspecting title documents to verify whether any real property is pledged as collateral. Performing cutoff tests of sales transactions with customers with long-standing receivable balances. Evaluating the entity's procedures for identifying and recording related party transactions. Inquiring of the entity's legal counsel about litigation, claims, and assessments.

Inquiring of the entity's legal counsel about litigation, claims, and assessments.

Qualified opinions are issued when the financial statements are ________ misstated.

Materially

What types of reports are issued when "component auditors" are involved?

Modifying Existing Paragraph: no responsibility Unmodified: taking responsibility

A change in the estimated service lives of previously recorded plant assets based on newly acquired information. (Yes or No)

A going concern is to be evaluated for a period not to exceed _________ beyond the date of the financial statements.

One year

A nonpublic company's 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 Unmodified with Emphasis-of-Matter (1) Yes Yes (2) Yes No (3) No Yes (4) No No Option 1 Option 2 Option 3 Option 4

Option 2

Situation: A client's financial statements follow GAAP except that they do not include a note on a significant related party transaction.

Qualified or Adverse

3. "Basis for Qualified Opinion: The Company has excluded from property and debt in the accompanying balance sheets certain lease obligations that, in our opinion, should be capitalized in order to conform with accounting principles generally accepted in the United States of America. If these lease obligations were capitalized, property would be increased by $3,500,000, long-term debt by $3,500,000, and retained earnings by $500,000 as of December 31, 20X5. Additionally, net income would be increased by $500,000 and earnings per share would be increased by $1.12 for the year then ended."

Retain the original text.

6. "Adams, Barnes & Co."

Retain the original text.

scope limitations * imposed by circumstances ** important accounting records destroyed * due to nature audit **engaged too late in yr to observe clients beginning inventory * imposed by client **client refused to allow auditors to send confirmations to customers ** often results in a disclaimer or opposed to a qualification

Scope Limitations(Qualified or Disclaimer Opinions)

Factors to consider

Slide 19

Basic elements

Title Addressee Opinion Basis for opinion Signature, tenure, location and date

A PCAOB public company audit report indicates that the audit was performed in accordance with PCAOB standards. T/F

True

A change in accounting principle from one generally accepted accounting principle to another normally would not prevent the issuance of an unmodified audit opinion, provided the effects of the change are set forth in a note to the financial statements and the change is justified. T/F

True

The term "except for" in an audit report is: No longer considered appropriate. Used in a qualified opinion. Used in an adverse opinion. Used for an unmodified opinion when an emphasis-of-matter paragraph is added.

Used in a qualified opinion.

A change from direct costing to full absorption costing for inventory valuation. (Yes or No)

Yes

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.

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.

A basis for a modification paragraph in the audit of the financial statements of a nonpublic company: a. Is only included with qualified, adverse, or disclaimers of opinion. b. Is presented after the opinion paragraph. c. Has a section title: Emphasis-of-Matter. d. Must be included in all nonpublic company audit reports.

a. Is only included with qualified, adverse, or disclaimers of opinion.

a. Not to be construed as a qualification, but rather as a division of responsibility between the two CPA firms.

If the auditors believe that related party transactions are not adequately described in the notes to the financial statements, they should: a. qualify their opinion or issue an adverse opinion. b. add an emphasis-of-matter paragraph to their unmodified opinion. c. consider more thoroughly the client's going concern status. d. disclaim an opinion.

a. qualify their opinion or issue an adverse opinion.

-a risk or uncertainty -significant related party transactions described in a note to the financial statements - the company is a component for a larger business enterprise -accounting matters affecting comparability(other than changes in accounting principles) of financial statements w/ those of the proceeding yr.

additional emphasis of matter situation- auditors discretionary

-Financial statements do not present fairly the financial position, results of operations, and cash flows of client in conformity with GAAP -Material and pervasive departures from GAAP -Auditor believes departure causes financial statements taken as a whole to be misleading

adverse opinion

It is expected that, in most audits, the auditor would determine that

at least one matter involved is especially challenging, subjective, or complex auditor judgment

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 emphasis-of-matter paragraph ordinarily: a. Relates to a report with a modified opinion. b. Follows the opinion paragraph. c. May either precede or follow the opinion paragraph. d. Is only included in an audit report with an adverse opinion.

b. Follows the opinion paragraph.

CPA Firm A has performed most of the audit of Consolidated Company's financial statements and qualifies as the group auditor. CPA Firm B did the remainder of the work. Firm A wishes to assume full responsibility for Firm B's work. Which of the following statements is correct? a. Such assumption of responsibility violates the profession's standards. b. In such circumstances, when appropriate requirements have been met, Firm A should issue a standard unmodified opinion on the financial statements. c.In such circumstances, when appropriate requirements have been met, Firm A should issue an unmodified opinion on the financial statements but should make appropriate reference to Firm B in the audit report. d. CPA firm A should normally qualify its audit report on the basis of the scope limitation involved when another CPA firm is involved.

b. In such circumstances, when appropriate requirements have been met, Firm A should issue a standard unmodified opinion on the financial statements.

When a client declines to disclose essential information in the financial statements or notes, the auditor of the financial statements should: a. Provide the information in the audit report, if practicable, and qualify the opinion because of a limitation on the scope of the audit. b. Provide the information in the audit report, if practicable, and qualify the opinion because of a departure from GAAP. c. Issue a disclaimer of opinion because the client has interfered with the auditor's function of assessing the adequacy of disclosure. d. Issue an unmodified opinion, but inform the reader by including the omitted information in the audit report.

b. Provide the information in the audit report, if practicable, and qualify the opinion because of a departure from GAAP.

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: Y/N Unmodified w/ EOM: Y/N a. Yes & Yes b. Yes & No c. No & Yes d. No & No

b. Yes & No

All nonpublic company audit reports that are qualified should contain a(n) __________ explaining the details of the qualification.

basis for modification paragraph (or basis for qualified opinion paragraph)

be unmodified as to the balance sheet and with a disclaimer of opinion as to the income statement and the statement of cash flows.

A scope restriction is least likely to result in a(an): a. Qualified opinion. b. Disclaimer of opinion. c. Adverse opinion. d. Standard unmodified opinion.

c. Adverse opinion.

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).

Which of the following is not an acceptable financial reporting framework? a. Cash basis. b. Tax basis. c. Generally accepted auditing standards basis. d. International accounting standards basis.

c. Generally accepted auditing standards basis.

What type or types of audit opinion are appropriate when financial statements are materially and pervasively misstated? Qualified: Y/N Adverse: Y/N a. Yes & Yes b. Yes & No c. No & Yes d. No & No

c. No & Yes

The primary responsibility for the adequacy of disclosure in the financial statements of a publicly-held company rests with the: a. Securities and Exchange Commission. b. partner assigned to the audit engagement. c. management of the company. d. auditor in charge of the field work.

c. management of the company.

An auditors' opinion exception arising from a limitation on the scope of the audit should be explained in: a. the mandatory adjusting entry whenever such a scope limitation occurs. b. a note to the financial statements. c. the auditors' report. d. both a note to the financial statements and the auditors' report.

c. the auditors' report.

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.

Which of the following procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern? a. Performing cutoff tests of sales transactions with customers with long-standing receivable balances. b. Evaluating the entity's procedures for identifying and recording related party transactions. c. Inspecting title documents to verify whether any real property is pledged as collateral. d. Inquiring of the entity's legal counsel about litigation, claims, and assessments.

d. Inquiring of the entity's legal counsel about litigation, claims, and assessments.

The auditor's responsibility relating to a GAAS audit is for __________ on the financial statements.

expressing an opinion

-qualified opinion -adverse opinion

if auditors have substantial doubt about a company's ability to continue as a going concern and managements disclosure are materially inadequate the appropriate audit report is an

bal sheet for each of the last 2 years

publicly owned companies are required to include in their annual reports:

render an adverse opinion and give reasons.

the standards of the PCAOB

the standard audit report for audits of public companies should reference

A(n) __________ opinion is an opinion that the financial statements of a public company fairly present financial position, results of operations, and cash flows, in conformity with generally accepted accounting principles.

unqualified

Your audit of the Abbox Co. reveals that the firm's poor financial condition creates substantial doubt about its ability to continue as a going concern. Assuming that the financial statements have otherwise been prepared in accordance with generally accepted accounting principles and do include proper presentation of the matter, what disclosure should you make of the company's precarious financial position? (A) You need not insist on any particular disclosure, since the company's poor financial condition is clearly indicated by the financial statements themselves. (B) You should issue an adverse opinion on the financial statements. (C) You should provide adequate disclosure and appropriately qualify your opinion because of the uncertainty. (D) You should issue an unmodified opinion, but use an emphasis-of-matter paragraph to direct the reader's attention to the poor financial condition of the company as described in the financial statements and the notes.

(D) You should issue an unmodified opinion, but use an emphasis-of-matter paragraph to direct the reader's attention to the poor financial condition of the company as described in the financial statements and the notes.

The primary responsibility for the adequacy of disclosure in the financial statements of a publicly-held company rests with the: (A) auditor in charge of the field work. (B) Securities and Exchange Commission. (C) partner assigned to the audit engagement. (D) management of the company.

(D) management of the company.

The auditor's unqualified report includes

-Basic elements -Communication regarding critical audit matters -Other explanatory language (or an explanatory paragraph) -Information about certain audit participants

For each critical audit matter communicated in the auditor's report the auditor must:

-Identify the critical audit matter; -Describe the principal considerations that led the auditor to determine that the matter is a critical audit matter; -Describe how the critical audit matter was addressed in the audit; -Refer to the relevant financial statement accounts or disclosures that relate to the critical audit matter.

What circumstance(s) result in a disclaimer of opinion?

-Large Scope Limitation -Uncertainty Situation (Lawsuit) -Going Concern

In a "going concern modification" an auditor evaluates whether there is "substantial doubt" about an entity's ability to continue as a going concern for a reasonable period of time. How long is this reasonable period of time?

1 year

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

1. Unmodified—standard.

Which of the following is not an acceptable financial reporting framework? a. Generally accepted auditing standards basis. b. Cash basis. c. Tax basis. d. International accounting standards basis.

independent registered

A standard audit report for a public company mist include " report of ___ ___ Public Accounting Firm" in the title

An audit client has refused to allow the auditors to perform an auditing procedure and there are no other effective alternate procedures available. The circumstance would normally result in the issuance of: A. A disclaimer of opinion. B. An adverse opinion. C. A standard unmodified opinion with a qualified scope paragraph. D. An unmodified report with an emphasis-of-matter paragraph.

A. A disclaimer of opinion.

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.

An audit report on a public company is least likely to include a paragraph titled: A. Auditor responsibility B. Basis for Opinion. C. Critical Audit Matters. D. Opinion on the Financial Statements.

A. Auditor responsibility

Which of the following circumstances generally results in the issuance of a report that is other than unqualified? A. Circumstances have significantly limited the scope of the auditors' procedures. B. The principal auditors for the engagement are relying on the work of other auditors. C. The financial statements depart from a standard established by the FASB because the auditors have concluded that application of the standard would result in materially misleading financial statements. D. The auditors have decided to emphasize the fact that the company has engaged in material amounts of related party transactions.

A. Circumstances have significantly limited the scope of the auditors' procedures.

The first paragraph of a standard unqualified audit report for a nonpublic client is referred to as the: A. Introductory paragraph. B. Scope paragraph. C. Opinion paragraph. D. Explanatory paragraph.

A. Introductory paragraph.

The auditors include explanatory language in an otherwise unqualified report in order to emphasize that the entity being reported upon is a subsidiary of another business enterprise. The inclusion of this explanatory language: A. Is appropriate and would not negate the unqualified opinion. B. Is considered a qualification of the report. C. Is a violation of generally accepted reporting standards if this information is disclosed in notes to the financial statements. D. Necessitates a revision of the opinion paragraph to include the phrase "with the foregoing explanation."

A. Is appropriate and would not negate the unqualified opinion.

Which of the following circumstances generally results in the issuance of a report that includes an opinion that is modified? A. The auditor is unable to obtain the financial records of a foreign subsidiary B. The group auditors for the engagement are relying on the work of component auditors. C. The financial statements are affected by a change in accounting principle due to a new FASB pronouncement. D. The auditors have decided to emphasize the fact that the company has engaged in material amounts of related party transactions.

A. The auditor is unable to obtain the financial records of a foreign subsidiary

Which of the following circumstances generally results in the issuance of a report that includes an opinion that is modified? A. The auditor is unable to obtain the financial records of a foreign subsidiary which is material to the client. B. The group auditors for the engagement are relying on the work of component auditors. C. The financial statements are affected by a change in accounting principle due to a new FASB pronouncement. D. The auditors have decided to emphasize the fact that the company has engaged in material amounts of related party transactions.

A. The auditor is unable to obtain the financial records of a foreign subsidiary which is material to the client.

PCAOB Form AP involves disclosure of: A. The engagement partner for the audit. B. Audit firm's liability for accounts payable to the audit client. C. Names of all staff members on the audit. D. Audit client executives.

A. The engagement partner for the audit.

The principal auditor is satisfied with the independence and professional reputation of the other auditor who has audited a subsidiary. To indicate the division of responsibility, the principal auditor should modify: A. The introductory, scope, and opinion paragraphs of the report. B. Only the scope paragraph of the report. C. Only the opinion paragraph of the report. D. Only the opinion paragraph of the report and include an explanatory paragraph.

A. The introductory, scope, and opinion paragraphs of the report.

Sufficient appropriate audit evidence is obtained when: (Select all that apply) a. the engagement letter is obtained from management b. FS are prepared c. all audit documentation has been reviewed

B, C

Disclosure requirements come from pronouncements issued by: (Select all that apply) a. PCAOB b. FASB c. AICPA d. GASB

B, D

An auditor's report on comparative financial statements should be dated as of the date of the: A. Issuance of the report. B. Accumulation of sufficient appropriate audit evidence. C. Latest financial statements being reported on. D. Last related-party transaction disclosed in the statements.

B. Accumulation of sufficient appropriate audit evidence.

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.

When the auditor is unable to determine the amounts associated with noncompliance with a law by client personnel due to a scope limitation, the auditor should issue a(an): A. Standard unmodified opinion. B. Disclaimer of opinion. C. Adverse opinion. D. Unmodified opinion with a separate emphasis-of-matter paragraph.

B. Disclaimer of opinion.

When the auditor is unable to determine the amounts associated with the illegal acts of client personnel because of an inability to obtain adequate evidence, the auditor should issue a(an): A. "Subject to" qualified opinion. B. Disclaimer of opinion. C. Adverse opinion. D. Unqualified opinion with a separate explanatory paragraph.

B. Disclaimer of opinion.

Which of the following is a term used in public company audit reports? A. Disclaimer of qualification. B. Explanatory paragraph. C. Other matter paragraph. D. Unmodified opinion.

B. Explanatory paragraph.

Which of the following is a "registration statement" that is filed with the SEC by a company planning to issue securities to the public? A. Form 8-K. B. Form S-1. C. Form 10-Q. D. Form 10-K.

B. Form S-1.

Which of the following is a "registration statement" that is filed with the SEC by a company planning to issue securities to the public? A. Form 8-K. B. Form S-1. C. Form 10-Q. D. Form 10-K.

B. Form S-1.

CPA Firm A has performed most of the audit of Consolidated Company's financial statements and qualifies as the group auditor. CPA Firm B did the remainder of the work. Firm A wishes to assume full responsibility for Firm B's work. Which of the following statements is correct? A. Such assumption of responsibility violates the profession's standards. B. In such circumstances, when appropriate requirements have been met, Firm A should issue a standard unmodified opinion on the financial statements. C. In such circumstances, when appropriate requirements have been met, Firm A should issue an unmodified opinion on the financial statements but should make appropriate reference to Firm B in the audit report. D. CPA firm A should normally qualify its audit report on the basis of the scope limitation involved when another CPA firm is involved.

B. In such circumstances, when appropriate requirements have been met, Firm A should issue a standard unmodified opinion on the financial statements.

When an auditor of financial statements has substantial doubt about an entity's ability to continue as a going concern, the auditor most likely would express a qualified or adverse opinion if: A. The effects of the adverse financial conditions are likely to be negative. B. Information about the entity's ability to continue as a going concern is not disclosed in the financial statements. C. Management has no plans to reduce or delay future expenditures. D. Negative trends and recurring operating losses appear to be irreversible.

B. Information about the entity's ability to continue as a going concern is not disclosed in the financial statements.

It is not appropriate for the auditors' report to refer a reader to a financial statement note for details regarding a(an): A. Change in accounting principle. B. Limitation in the scope of the audit. C. Uncertainty. D. Related party transaction.

B. Limitation in the scope of the audit.

Which of the following is least likely to result in an adverse opinion? A. Change in accounting principle. B. Limitation in the scope of the audit. C. Uncertainty. D. Related party transaction.

B. Limitation in the scope of the audit.

When a client declines to disclose essential information in the financial statements or notes, the auditor of the financial statements should: A. Provide the information in the audit report, if practicable, and qualify the opinion because of a limitation on the scope of the audit. B. Provide the information in the audit report, if practicable, and qualify the opinion because of a departure from GAAP. C. Issue a disclaimer of opinion because the client has interfered with the auditor's function of assessing the adequacy of disclosure. D. Issue an unqualified opinion, but inform the reader by including the omitted information in the audit report.

B. Provide the information in the audit report, if practicable, and qualify the opinion because of a departure from GAAP.

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

B. Qualified: Yes, Unmodified with Emphasis-of-Matter No

The unqualified standard audit report of a nonpublic company does not explicitly state that: A. The financial statements are the responsibility of the company's management. B. The audit was conducted in accordance with accounting principles generally accepted in the United States of America. C. The auditors believe that the audit provides a reasonable basis for their opinion. D. An audit includes assessing the accounting principles used.

B. The audit was conducted in accordance with accounting principles generally accepted in the United States of America.

If audited financial statements include a balance sheet and an income statement, but do not include a statement of cash flows: A. The auditors may still issue an unmodified opinion. B. The auditors should issue a qualified report for the departure from generally accepted accounting principles. C. The auditors should issue a qualified report indicating a scope limitation in that no statement of cash flows is presented. D. The auditors should disclaim an opinion on the overall financial statements.

B. The auditors should issue a qualified report for the departure from generally accepted accounting principles.

When an adverse opinion is expressed, the opinion paragraph should include a direct reference to: A. A note to the financial statements which discusses the basis for the opinion. B. The scope paragraph which discusses the basis for the opinion rendered. C. A separate paragraph which discusses the basis for the opinion rendered. D. The consistency in the application of generally accepted accounting principles.

C. A separate paragraph which discusses the basis for the opinion rendered.

A scope restriction is least likely to result in a(an): A. Qualified opinion. B. Disclaimer of opinion. C. Adverse opinion. D. Standard unmodified opinion.

C. Adverse opinion.

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).

When financial statements are affected by a material departure from generally accepted accounting principles, the auditors should: A. Issue an unqualified report with an explanatory paragraph. B. Withdraw from the engagement. C. Issue an "except for" qualification or an adverse opinion. D. Issue an "except for" qualification or a disclaimer of opinion.

C. Issue an "except for" qualification or an adverse opinion.

Morgan, CPA, is the principal auditor for a multinational corporation. Another CPA has examined and reported on the financial statements of a significant subsidiary of the corporation. Morgan is satisfied with the independence and professional reputation of the other auditor, as well as the quality of the other auditor's audit. With respect to Morgan's report on the consolidated financial statements, taken as a whole, Morgan: A. Must not refer to the audit of the other CPA. B. Must refer to the audit of the other CPA. C. May refer to the audit of the other CPA. D. May refer to the audit of the other CPA, in which case Morgan must include in the audit report on the consolidated financial statements a qualified opinion with respect to the audit of the other CPA.

C. May refer to the audit of the other CPA.

The first section of a public company audit report is the: A. Basis for opinion section. B. Critical audit matters section. C. Opinion section. D. Introductory paragraph.

C. Opinion section.

Which of the following modifications of the auditors' report does not include an additional paragraph? A. The report is qualified because the financial statements contain a material departure from generally accepted accounting principles. B. The report includes an emphasis of a matter. C. The audit report indicates a division of responsibility between two CPA firms. D. The report is qualified because the scope of the auditors' work was restricted.

C. The audit report indicates a division of responsibility between two CPA firms.

In which of the following circumstances will it be most likely that an adverse opinion is considered appropriate? A. The auditor is not independent with respect to the enterprise being audited. B. The statements are not in conformity with generally accepted accounting principles due to a departure from GAAP with an immaterial effect on the financial statements. C. The statements are not in conformity with generally accepted accounting principles regarding pension plans. D. A client-imposed scope limitation prevents the auditor from obtaining sufficient appropriate audit evidence.

C. The statements are not in conformity with generally accepted accounting principles regarding pension plans.

The term "except for" in an audit report is: A. Used in an adverse opinion. B. No longer considered appropriate. C. Used in a qualified opinion D. Used for an unqualified opinion when an explanatory paragraph is added.

C. Used in a qualified opinion

Scenario: A company has changed the remaining life of a significant asset from 12 to 10 years. You believe that the change is reasonable.

Circumstance: Consistency or None Type of Opinion(s): Unmodified Report Alteration: No alteration

For a particular entity's financial statements to be presented fairly in conformity with generally accepted accounting principles, it is not required that the principles selected: A. Be appropriate in the circumstances for the particular entity. B. Reflect transactions in a manner that presents the financial statements within a range of acceptable limits. C. Present information in the financial statements that is classified and summarized in a reasonable manner. D. Be applied on a basis consistent with those followed in the prior year.

D. Be applied on a basis consistent with those followed in the prior year.

When an auditor has concluded there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time beyond the current financial statement date (9/30/X1), the auditor's responsibility includes: A. Preparing prospective financial information to verify whether management's plans can be effectively implemented. B. Projecting conditions and events from one year prior to this year's date (9/30/X0) to 9/30/X1. C. Issuing an adverse or negative assurance opinion, depending upon materiality, due to the possible effects on the financial statements. D. Considering the adequacy of disclosure about the entity's possible inability to continue as a going concern.

D. Considering the adequacy of disclosure about the entity's possible inability to continue as a going concern.

For a continuing audit client, when a complete set of financial statements is presented on a comparative basis for two years, the auditors' opinion would refer to: A. Only the current year under audit. B. Either one or both years at the option of the auditors. C. Each of the two years plus the preceding year. D. Each of the years in the two-year period.

D. Each of the years in the two-year period.

Which of the following procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern? A. Performing cutoff tests of sales transactions with customers with long-standing receivable balances. B. Evaluating the entity's procedures for identifying and recording related party transactions. C. Inspecting title documents to verify whether any real property is pledged as collateral. D. Inquiring of the entity's legal counsel about litigation, claims, and assessments.

D. Inquiring of the entity's legal counsel about litigation, claims, and assessments.

Which of the following procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern? A. Performing cutoff tests of sales transactions with customers with long-standing receivable balances. B. Evaluating the entity's procedures for identifying and recording related party transactions. C. Inspecting title documents to verify whether any real property is pledged as collateral. D. Inquiring of the entity's legal counsel about litigation, claims, and assessments.

D. Inquiring of the entity's legal counsel about litigation, claims, and assessments.

Of the following, a public company audit report is most likely to be addressed to the: A. Internal audit team. B. Company itself. C. Management. D. Shareholders.

D. Shareholders.

After performing all necessary procedures, the predecessor auditors reissue a prior-period report on financial statements at the request of the client without revising the original wording. The predecessor auditors should: A. Delete the date of the report. B. Dual-date the report C. Use the reissue date. D. Use the date of the previous report.

D. Use the date of the previous report.

A "very material" change from one generally accepted accounting principle to another generally accepted accounting principle usually results in an adverse opinion by the auditors. True False

FALSE

A public company's financial statements should be prepared following standards of the Public Company Accounting Oversight Board. True False

FALSE

Audit reports should be dated the date on which the financial statements are issued. True False

FALSE

If financial statements fail to disclose a material fact, the auditors may disclose the information in an explanatory paragraph and issue an unqualified opinion on the statements. True False

FALSE

When the auditors are unable to comply with generally accepted auditing standards, they should issue an opinion that is unqualified, but include an additional explanatory paragraph in the report. True False

FALSE

The auditors are not allowed to change their opinion on financial statements that were reported on in prior years. T/F

False

Type of Report: The financial statements contain a material departure from generally accepted accounting principles.

Qualified

Which of the following is least likely to result in a qualification of the auditors' opinion due to a scope limitation? Inability to obtain sufficient appropriate audit evidence. Scope limitations imposed by the client. Inadequate accounting records. Reliance placed upon the report of component auditors.

Reliance placed upon the report of component auditors.

2. "Sam Best, President"

Replace with "Board of Directors of Keystone"

7. "February 6, 20X6."

Replace with "January 31, 20X6, except for Note 7, as to which the date is February 2, 20X6."

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:

Report is delivered to the client. (Reference to the work of a component auditor is not, in itself, a qualification of the group audit report. This reference does not lessen the auditors' collective responsibility. Rather, it merely divides this responsibility among two or more CPA firms.)

¨Report covers both years ¨Can express different opinions on different years ¨If prior period audited by another (predecessor) CPA firm ¡Current year opinion only covers years the CPA firm audited. ¡For financial statements audited by predecessor auditor either: úPredecessor auditor reissues report with original date, or úCurrent auditor refers to report of other auditor.

Reporting on Comparative Financial Statements

Situation: 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

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

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

The term material may be defined as "sufficiently important to influence decisions made by reasonable users of financial statements.'' T/F

True

Your audit of the Abbox Co. reveals that the firm's poor financial condition creates substantial doubt about its ability to continue as a going concern. Assuming that the financial statements have otherwise been prepared in accordance with generally accepted accounting principles and do include proper presentation of the matter, what disclosure should you make of the company's precarious financial position? a. You should issue an unmodified opinion, but use an emphasis-of-matter paragraph to direct the reader's attention to the poor financial condition of the company as described in the financial statements and the notes. b. You should issue an adverse opinion on the financial statements. c. You need not insist on any particular disclosure, since the company's poor financial condition is clearly indicated by the financial statements themselves. d. You should provide adequate disclosure and appropriately qualify your opinion because of the uncertainty.

a. You should issue an unmodified opinion, but use an emphasis-of-matter paragraph to direct the reader's attention to the poor financial condition of the company as described in the financial statements and the notes.

standard

auditors cannot issue the ___ report for an audit if there are material departures from GAAP in the fin statements.

b. Auditors have accumulated sufficient evidence.

¨Scope limitations that are material and pervasive ¨Significant Going concern issues

disclaimer

The primary responsibility for the adequacy of disclosure in the financial statements of a publicly-held company rests with the: partner assigned to the audit engagement. management of the company. auditor in charge of the field work. Securities and Exchange Commission.

management of the company.

disclaimer of

multiple uncertainties that cause the auditors to conclude it's not possible to form an opinion of the financial statements may make an ___ opinion appropriate.

Which of the following does NOT ordinarily involve the addition of an emphasis of a matter paragraph?

part of the audit has been performed by other auditors

qualify their opinion or issue an adverse opinion.

- management must evaluate whether there is substantial doubt about the company's ability to continue is existence for a reasonable period of time. - auditor is not required to perform procedures specifically designed to test going concern assumptions but must evaluate the assumption

requirements for emphasis of matter: going concern

going concern

when auditors have concern about a company's ability to continue as an ___ ___, they should consider whether managements plans for dealing with the conditions are likely to mitigate the problem.

unmodified ... standard

when the auditors have obtained suff appropriate audit evidence to conclude the fin statements, taken as a whole, are not materially misstated and there is no need to disclose additional info, they will issue an ___ opinion using an ___ report

the auditors

whose responsibility is the audit report

Which of the following is not correct relating to an audit report for a public company? (A) It includes the term "PCAOB Compliant" in the title. (B) It includes an additional paragraph indicating that the auditors have also issued a report on the client's internal control over financial reporting. (C) It refers to standards of the Public Company Accounting Oversight Board. (D) It must include the city and state in which it was issued.

(A) It includes the term "PCAOB Compliant" in the title.

A client company has changed its accounting practices during the year, materially affecting its financial statements so as to make them seriously misleading and not in conformity with generally accepted accounting principles. The CPAs examining these financial statements should: (A) modify the opinion with respect to consistency and, in an emphasis-of-matter paragraph, explain the changes and their effects on the net income of the period. (B) render an adverse opinion and give reasons. (C) modify the opinion with respect to consistency, referring to explanatory notes of the financial statements to fulfill disclosure requirements. (D) disclaim an opinion and give reasons.

(B) render an adverse opinion and give reasons.

"As discussed in Note XX to the FS, the company is a defendant in a lawsuit."

Auditor discretionary circumstances

The primary responsibility for the adequacy of disclosure in the financial statements of a publicly-held company rests with the: a. auditor in charge of the field work. b. management of the company. c. partner assigned to the audit engagement. d. Securities and Exchange Commission.

When auditors determine a change in accounting principle is not appropriate, the auditors can issue: (Select all that apply) a. Unmodified opinion with emphasis of matter paragraph b. Qualified opinion c. Disclaimer of opinion d. Adverse opinion

B, D

A scope limitation that does not allow the auditors to obtain sufficient appropriate audit evidence for a substantial portion of the FS should result in: a. qualified opinion b. adverse opinion c. disclaimer of opinion

In which of the following circumstances would an adverse opinion be appropriate? A. The auditor is not independent with respect to the enterprise being audited. B. The statements are not in conformity with generally accepted accounting principles because they omit a statement of changes in financial position. C. The statements are not in conformity with generally accepted accounting principles regarding pension plans. D. A client-imposed scope limitation prevents the auditor from complying with generally accepted auditing standards.

C. The statements are not in conformity with generally accepted accounting principles regarding pension plans.

5. "As discussed in Note 4 to the financial statements, in 20X5 the entity elected to change the estimated life of a number of its plant assets. We concur with this change."

Delete entire paragraph.

Which of the following is a term used in public company audit reports? Other matter paragraph. Explanatory paragraph. Disclaimer of qualification. Unmodified opinion.

Explanatory paragraph.

Which of the following representations does an auditor make explicitly and which implicitly when issuing an unqualified opinion on public company financial statements? Conformity with PCAOB Standards: Explicitly Implicitly Adequacy of Diclosure: Explicitly Implicitly

Explicitly Implicitly

Audit reports for group audit engagements are considered to be qualified reports. T/F

False

T or F: A disclaimer of opinion may be used as a way to avoid expressing an adverse opinion.

False

T/F: Audit reports for group audit engagements are considered to be qualified reports.

False

T/F: The auditors are not allowed to change their opinion on financial statements that were reported on in prior years.

False

The auditors should generally issue a qualified opinion if circumstances involved make it impossible for them to observe the physical inventory or to confirm accounts receivable, even when sufficient appropriate audit evidence has been gathered using alternate procedures. T/F

False

The unique nature of modified opinions makes them desirable to most clients. T/F

False

When a client omits notes to audited financial statements, the auditor should add an emphasis-of-matter section to the report indicating such omission and issue an unmodified report. T/F

False

T or F: A qualified opinion is appropriate when a departure from generally accepted accounting principles is material enough to deserve mention in the auditors' report, but not material enough to call for expression of a disclaimer of opinion.

False - Adverse

An emphasis-of-matter paragraph always _______ the opinion paragraph.

Follows

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

Generally accepted accounting principles (United States).

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

Generally accepted accounting principles (United States).

Which of the following is not an acceptable financial reporting framework?

Generally accepted auditing standards basis.

Which of the following is not an acceptable financial reporting framework? Cash basis. International accounting standards basis. Generally accepted auditing standards basis. Tax basis.

Generally accepted auditing standards basis.

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

Standard Unmodified

Situation: 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

Situation: A company has not followed generally accepted accounting principles in the recording of its leases. The amounts involved are immaterial.

Standard Unmodified

Situation: A component auditor has audited a subsidiary of your client as a part of a group audit. You have decided to rely upon the component auditor's work.

Standard Unmodified

he auditor is in a position to express an unqualified opinion on the financial statements when

The auditor conducted an audit in accordance with the standards of the Public Company Accounting Oversight Board ("PCAOB") and concludes that the financial statements, taken as a whole, are presented fairly, in all material respects, in conformity with the applicable financial reporting framework

Which of the following is least likely to be included in a public company audit report with an unqualified opinion? A basis for opinion paragraph. A section on critical matters. The name of the engagement partner. A title with the word "Independent."

The name of the engagement partner.

Report Type: The auditors decide not to make reference to the report of a component auditor that audited a portion of group financial statements.

Unmodified - standard report (does not affect the opinion)

Type of Report: Auditors have doubt about a company's ability to continue as a going concern.

Unmodified opinion with emphasis of matter paragraph

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

Unmodified—standard.

Correction of a mathematical error in inventory pricing made in a prior period. Should the audit report include an emphasis-of-matter paragraph on consistency?

Yes

Unmodified? Additional paragraph? Reliance upon component auditors.

Yes, no

When an adverse opinion is expressed, the opinion paragraph should include a direct reference to:

a separate paragraph that discusses the basis for the opinion expressed.

-Auditor has no opinion -Issued whenever the auditor is unable to form an opinion as to fairness of financial statements -Circumstances resulting in a disclaimer are those in which the possible misstatements are material and pervasive. --Multiple uncertainties may also lead to a disclaimer -Not an alternative to adverse opinion

disclaimer of opinion

company changed accounting principles resulting in a material effect on the financial statements being reported on in accepting the change the auditors should evaluate whether -the newly adopted principle is generally accepted -the method of accounting for the effect of the change is in conformity with GAAP -the disclosure related to the change are adequate -management has justified that the new accounting principle is preferable

emphasis of a matter -lack of consistency

- negative cash flow from operations -defaults on loan agreements -adverse financial ratios - work stoppages -legal proceedings -loss of a key franchise, customer, or supplier - an uninsured catastrophe

emphasis of a matter- going concern conditions indicative of going concern?

A scope restriction is least likely to result in a(an): Standard unmodified opinion. Qualified opinion. Adverse opinion. Disclaimer of opinion.

Adverse opinion

A scope restriction is least likely to result in a(an): Qualified opinion. Disclaimer of opinion. Adverse opinion. Standard unmodified opinion.

Adverse opinion.

Auditors who want to emphasize significant client transactions with related parties can issue: a. qualified opinion b. qualified opinion with an emphasis of matter paragraph c. unmodified opinion with an emphasis of matter paragraph d. disclaimer of opinion

For comparative FS, the auditor can issue an opinion that covers both years if: a. the audit opinion was unmodified in the prior year b. predecessor auditors issued an unmodified opinion on the prior year c. the prior year was audited by the firm

For departures from GAAP due to omission of information that is material and pervasive, auditors should issue a(n): a. unmodified opinion b. qualified opinion c. adverse opinion

If the auditors believe that related party transactions are not adequately described in the notes to the financial statements, they should: a. add an emphasis-of-matter paragraph to their unmodified opinion. b. consider more thoroughly the client's going concern status. c. qualify their opinion or issue an adverse opinion. d. disclaim an opinion.

In the US, FS are most frequently prepared following this general-purpose framework. a. Tax basis b. GAAS c. GAAP d. IFRS

Modifications to the audit report for a departure from GAAP that is material but not pervasive include a qualification of the opinion paragraph and an additional basis for modification paragraph: a. after the opinion b. anywhere in the report c. before the opinion

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

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; Unmodified with Emphasis-of-Matter a. Yes Yes b. Yes No c. No Yes d. No No

Which of the following accounting changes requires an emphasis of matter paragraph regarding consistency in auditor's report? a. Useful life b. Write off of patent c. Change in depreciation from straight-line to accelerated d. Change in calculating bad debt expense from 1% to 2%

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.

Which of the following is not correct relating to an audit report for a public company? a. It must include the city and state in which it was issued. b. It refers to standards of the Public Company Accounting Oversight Board. c. It includes the term "PCAOB Compliant" in the title. d. It includes an additional paragraph indicating that the auditors have also issued a report on the client's internal control over financial reporting.

If group auditors make no reference to component auditors whose work they have relied on as basis for their report. Auditors are doing what?

Taking responsibility for the work

auditors also have issued a report on the clients internal control over fin reporting

The PCAOB audit report includes an additional paragraph indicating:

Which of the following modifications of the auditors' report does not include an additional paragraph? The report is qualified because the scope of the auditors' work was limited. The audit report of a nonpublic company indicates a division of responsibility between two CPA firms. The report includes an emphasis of a matter. The report is qualified because the financial statements contain a material departure from generally accepted accounting principles.

The audit report of a nonpublic company indicates a division of responsibility between two CPA firms.

The unmodified standard audit report of a nonpublic company does not explicitly state that: The financial statements are the responsibility of the company's management. The audit was conducted in accordance with accounting principles generally accepted in the United States of America. The auditors believe that the audit provides a reasonable basis for their opinion. An audit includes evaluating the appropriateness of accounting policies used.

The audit was conducted in accordance with accounting principles generally accepted in the United States of America.

The unmodified standard audit report of a nonpublic company does not explicitly state that: The financial statements are the responsibility of the company's management. The auditors believe that the audit provides a reasonable basis for their opinion. The audit was conducted in accordance with accounting principles generally accepted in the United States of America. An audit includes evaluating the appropriateness of accounting policies used.

The audit was conducted in accordance with accounting principles generally accepted in the United States of America.

Which of the following circumstances generally results in the issuance of a report that includes an opinion that is modified? The group auditors for the engagement are relying on the work of component auditors. The auditor is unable to obtain the financial records of a foreign subsidiary which is material to the client. The financial statements are affected by a change in accounting principle due to a new FASB pronouncement. The auditors have decided to emphasize the fact that the company has engaged in material amounts of related party transactions.

The auditor is unable to obtain the financial records of a foreign subsidiary which is material to the client.

Under which of the following set of circumstances might the auditors disclaim an opinion? The group auditors decide to make reference to the report of component auditor who audited a subsidiary. There has been a material change between periods in the method of application of accounting principles. The financial statements contain a departure from generally accepted accounting principles, the effect of which is material. The auditors cannot observe ending inventory nor confirm accounts receivable and cannot obtain sufficient evidence using alternative procedures.

The auditors cannot observe ending inventory nor confirm accounts receivable and cannot obtain sufficient evidence using alternative procedures.

The following language, including the section title "Critical Audit Matters," should precede critical audit matters communicated in the auditor's report: JUST READ A LOT

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

What is the objective of auditor reporting responsibilities with respect to consistency?

To give assurance that users will be informed of the lack of comparability of financial statements between periods due to changes in accounting principles.

Which of the following summarizes auditor reporting responsibility with respect to consistency? To give assurance that adequate disclosure will be made so that there will be comparability of financial statements between companies in the same industry. To give assurance that users will be informed of the lack of comparability of financial statements between periods due to changes in accounting principles. To give assurance that the comparability of financial statements between periods has not been materially affected by any type of change. To give assurance only that the same accounting principles have been applied to all similar transactions within each period presented.

To give assurance that users will be informed of the lack of comparability of financial statements between periods due to changes in accounting principles.

A qualified opinion that is issued because of a departure from generally accepted accounting principles should contain a separate section explaining the departure and its effects. T/F

True

A standard unmodified audit report does not mention consistency of application of accounting principles. T/F

True

An adverse opinion is an opinion that the financial statements are not presented fairly in accordance with generally accepted accounting principles. T/F

True

For most American corporations, a Form S-1 must be filed with the SEC if a U.S. company is planning to issue securities to the public. T/F

True

No emphasis-of-matter paragraph is added to a nonpublic company audit report when the group auditor chooses not to rely upon the component auditor. T/F

True

A change from the FIFO method of inventory pricing to the LIFO method of inventory pricing. Should the audit report include an emphasis-of-matter paragraph on consistency?

Yes

A change from the completed-contract method to the percentage-of-completion method of accounting for long-term construction contracts. (Yes or No)

Yes

Correction of a mathematical error in inventory pricing made in a prior period. (Yes or No)

Yes

Should an emphasis-of-matter paragraph on consistency be included in the report? A change from deferring and amortizing preproduction costs to recording such costs as an expense when incurred because future benefits of the costs have become doubtful. The new accounting method was adopted in recognition of the change in estimated future benefits.

Yes

Should an emphasis-of-matter paragraph on consistency be included in the report? A change from direct costing to full absorption costing for inventory valuation.

Yes

Should an emphasis-of-matter paragraph on consistency be included in the report? A change from the FIFO method of inventory pricing to the LIFO method of inventory pricing.

Yes

Should an emphasis-of-matter paragraph on consistency be included in the report? A change from the completed contract method to the percentageofcompletion method of accounting for longterm construction contracts.

Yes

Should an emphasis-of-matter paragraph on consistency be included in the report? Correction of a mathematical error in inventory pricing made in a prior period.

Yes

Upon the advice of its auditors, Smith Company changed the method of computing depreciation from the straight-line method to an accelerated method with a material effect upon the financial statements. The auditors' report: must be qualified for the accounting change. should include an additional paragraph highlighting the accounting change. should contain modification of the opinion paragraph. should be a standard unmodified report.

should include an additional paragraph highlighting the accounting change.

disclaimer of

multiple uncertainties that cause the auditor to conclude its not possible to form an opinion on the fin statements may make an ___ opinion appropriate

Who can define Pervasive? Pervasive: Inclusive...all throughout. (Can't just tear off the mold and eat the bread.) •Not confined to specific accounts or items on the FS •Fundamental to users •Could be a substantial proportion of the FS

pervasive

properly indicating a division of responsibility, and the report should further indicate in an appropriate quantitative form the proportionate responsibility being assumed by each set of auditors.

If the auditors indicate in the report that the opinion is based, in part, on the report of component auditors who were responsible for the audit of part of the total financial statement data, the auditors are: in effect qualifying the opinion. properly indicating a division of responsibility, and the report should further indicate in an appropriate quantitative form the proportionate responsibility being assumed by each set of auditors. taking complete responsible for the work of the other auditors. abrogating responsibility to those users who rely on the CPA firm's reputation as a basis for relying on the reported financial statements.

properly indicating a division of responsibility, and the report should further indicate in an appropriate quantitative form the proportionate responsibility being assumed by each set of auditors.

-Departure from GAAP --Immaterial - unmodified --Material - qualified --Material and pervasive—Adverse -Misstatements become pervasive when any one of the following applies: --Not confined to specific accounts. --f confined, they represent a substantial proportion of the financial statements. --In relation to disclosures, they are fundamental to users' understanding of the financial statements.

qualified opinion-departure from GAAP

If the auditors believe that related party transactions are not adequately described in the notes to the financial statements, they should:

qualify their opinion or issue an adverse opinion.

A client company has changed its accounting practices during the year, materially affecting its financial statements so as to make them seriously misleading and not in conformity with generally accepted accounting principles. The CPAs examining these financial statements should: render an adverse opinion and give reasons. modify the opinion with respect to consistency and, in an emphasis-of-matter paragraph, explain the changes and their effects on the net income of the period. disclaim an opinion and give reasons. modify the opinion with respect to consistency, referring to explanatory notes of the financial statements to fulfill disclosure requirements.

render an adverse opinion and give reasons.

should include an additional emphasis-of-matter paragraph highlighting the accounting change.

Substantial doubt about a nonpublic client's ability to remain a going concern ordinarily results in a report with an unmodified opinion with an emphasis-of-matter paragraph or a disclaimer of opinion when the doubt is properly disclosed in the financial statements. T/F

True

T or F: A PCAOB public company audit report indicates that the audit was performed in accordance with PCAOB standards.

True

T or F: A change in accounting principle from one generally accepted accounting principle to another normally would not prevent the issuance of an unmodified audit opinion, provided the effects of the change are set forth in a note to the financial statements and the change is justified.

True

T or F: A qualified opinion that is issued because of a departure from generally accepted accounting principles should contain a separate section explaining the departure and its effects.

True

T or F: A standard unmodified audit report does not mention consistency of application of accounting principles.

True

T or F: An adverse opinion is an opinion that the financial statements are not presented fairly in accordance with generally accepted accounting principles.

True

T or F: For most American corporations, a Form S-1 must be filed with the SEC if a U.S. company is planning to issue securities to the public.

True

T or F: No emphasis-of-matter paragraph is added to an audit report when the group auditor chooses not to rely upon the component auditor.

True

T or F: Substantial doubt about a client's ability to remain a going concern ordinarily results in a report with an unmodified opinion with an emphasis-of-matter paragraph or a disclaimer of opinion when the doubt is properly disclosed in the financial statements.

True

T/F: A standard unmodified audit report does not mention consistency of application of accounting principles.

True

T/F: An adverse opinion is an opinion that the financial statements are not presented fairly in accordance with generally accepted accounting principles.

True

A situation in which conclusive audit evidence concerning the ultimate outcome cannot be gathered because the outcome will occur in the future is called a(n) __________.

Uncertainty

Type of Report: Auditors have obtained sufficiently appropriate evidence to conclude that the financial statements are not materially misstated.

Unmodified

Report Type: 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 - emphasis-of-matter paragraph (auditors concur, material but inventory is not a huge part of assets)

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. What type of audit report should be used?

Unmodified - with an emphasis-of-matter paragraph

Report Type: Bowles Company is engaged in a 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

Type of Report: The auditors wish to emphasize in the report a material and pervasive subsequent event described in the notes to the financial statements.

Unmodified opinion with an emphasis of a matter paragraph

Type of Report: The auditors wish to emphasize in the report a material subsequent event described in the notes to the financial statements.

Unmodified opinion with an emphasis of a matter paragraph

Type of Report: The financial statements reflect a change from one generally accounting principles to another generally accepted accounting principle. The auditor considers the new principle preferable to the previous one. It has a material and pervasive effect.

Unmodified opinion with an emphasis of a matter paragraph

Situation: Bowles Company is engaged in a 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

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

Unmodified standard

¨Going concern issues that are disclosed ¨Change in accounting principles where auditors agree with the change ¨Related parties ¨Matters that auditors wish to emphasize

Unmodified with Emphasis of a Matter Paragraph

Situation: 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

Situation: 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

Unmodified with an Emphasis of Matter Paragraph or Disclaimer

Limitations on the scope of an audit may create a situation in which the auditors are unable to obtain sufficient ________.

Evidence

The Rotter Company, a nonpublic company, changed accounting principles in 20X4 from those followed in 20X3. The auditor believes that the new principles are not in conformity with GAAP, and therefore that the 20X4 financial statements are misleading due to pervasive misstatements. The change (including its dollar effect) has been described in the notes to the 20X4 statements. Under these circumstances, in reporting on the 20X4 financial statements, the auditor should: Express an adverse opinion with the basis for modification paragraph disclosing the reason (the accounting change) for the opinion. Express an unmodified opinion with an emphasis-of-matter paragraph and disclose the accounting change from 20X3 and its effect on the financial statements. Disclaim an opinion and explain all of the reasons therefore. Express an adverse opinion regarding the 20X4 financial statements, without a basis for modification paragraph since the reason will be included in the notes to the statements.

Express an adverse opinion with the basis for modification paragraph disclosing the reason (the accounting change) for the opinion.

A qualified opinion for a departure from GAAP ordinarily indicates that a portion of the financial statements do not follow GAAP and disclaims an opinion on the other parts of the financial statements. T/F

False

A qualified opinion is appropriate when a departure from generally accepted accounting principles is material enough to deserve mention in the auditors' report, but not material enough to call for expression of a disclaimer of opinion. T/F

False

A scope limitation during an audit will result in either a qualified or adverse opinion, depending upon the pervasiveness of the misstatement T/F

False

Emphasis-of-matter paragraphs in nonpublic company audit reports are potentially appropriate in all reports except those with unmodified opinions. T/F

False

If a company is faced with any uncertainty such as the prospect of a strike, the auditors should issue a qualified or adverse opinion. T/F

False

T or F: A "Basis for Qualified Opinion" section is ordinarily placed immediately following the introductory paragraph in audit reports with qualified or adverse opinions.

False

T or F: A USA nonpublic company audit report indicates that the audit was performed in accordance with "generally accepted accounting principles."

False

T or F: A scope limitation during an audit will result in either a qualified or adverse opinion, depending upon the pervasiveness of the misstatement.

False

T or F: Audit reports for group audit engagements are considered to be qualified reports.

False

T or F: Emphasis-of-matter paragraphs are potentially appropriate in all reports except those with unmodified opinions.

False

T or F: If a company is faced with any uncertainty such as the prospect of a strike or the possible imposition of wage and price controls, the auditors should issue a qualified or adverse opinion.

False

T or F: The auditors are not allowed to change their opinion on financial statements that were reported on in prior years.

False

T or F: The auditors should generally issue a qualified opinion if circumstances involved make it impossible for them to observe the physical inventory or to confirm accounts receivable, even when sufficient appropriate audit evidence has been gathered using alternate procedures.

False

T or F: The unique nature of modified opinions makes them desirable to most clients.

False

A critical audit matter is any matter arising from the audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the financial statements (2) involved especially challenging, subjective, or complex auditor judgment.

When an adverse opinion is expressed, the opinion paragraph should include a direct reference to: (A) a separate paragraph that discusses the basis for the opinion expressed. (B) a note to the financial statements which discusses the basis for the opinion. (C) the consistency or lack of consistency in the application of generally accepted accounting principles. (D) the paragraph that describes management's responsibilities.

(A) a separate paragraph that discusses the basis for the opinion expressed.

Which of the following is not an acceptable financial reporting framework? (A) Cash basis. (B) Generally accepted auditing standards basis. (C) Tax basis. (D) International accounting standards basis.

(B) Generally accepted auditing standards basis.

What is the objective of auditor reporting responsibilities with respect to consistency? (A) To give assurance that adequate disclosure will be made so that there will be comparability of financial statements between companies in the same industry. (B) To give assurance that users will be informed of the lack of comparability of financial statements between periods due to changes in accounting principles. (C) To give assurance only that the same accounting principles have been applied to all similar transactions within each period presented. (D) To give assurance that the comparability of financial statements between periods has not been materially affected by any type of change.

(B) To give assurance that users will be informed of the lack of comparability of financial statements between periods due to changes in accounting principles.

Jones, CPA, accepts a new client late in Year 5 and therefore had no opportunity to observe the physical inventory taken at December 31, Year 4. Jones found it impossible to obtain evidence by other auditing procedures as to the beginning inventories for Year 5. Jones observed the physical inventory at December 31, Year 5 and completed the audit satisfactorily. The report to be issued should: (A) be qualified as to all of the statements. (B) be unmodified as to the balance sheet and with a disclaimer of opinion as to the income statement and the statement of cash flows. (C) be unmodified. (D) be a disclaimer of opinion.

(B) be unmodified as to the balance sheet and with a disclaimer of opinion as to the income statement and the statement of cash flows.

If the auditors indicate in the report that the opinion is based, in part, on the report of component auditors who were responsible for the audit of part of the total financial statement data, the auditors are: (A) taking complete responsible for the work of the other auditors. (B) properly indicating a division of responsibility, and the report should further indicate in an appropriate quantitative form the proportionate responsibility being assumed by each set of auditors. (C) abrogating responsibility to those users who rely on the CPA firm's reputation as a basis for relying on the reported financial statements. (D) in effect qualifying the opinion.

(B) properly indicating a division of responsibility, and the report should further indicate in an appropriate quantitative form the proportionate responsibility being assumed by each set of auditors.

An auditors' opinion exception arising from a limitation on the scope of the audit should be explained in: (A) both a note to the financial statements and the auditors' report. (B) the auditors' report. (C) a note to the financial statements. (D) the mandatory adjusting entry whenever such a scope limitation occurs.

(B) the auditors' report.

A note to the financial statements of the First Security Bank indicates that the company self insures itself for the first $100,000 of liability to employees, with liability insurance for the remainder. Based upon this, one would expect the auditors' report to express: (A) a disclaimer of opinion. (B) a qualified opinion. (C) a standard unmodified opinion. (D) an adverse opinion.

If the auditors believe that related party transactions are not adequately described in the notes to the financial statements, they should: add an emphasis-of-matter paragraph to their (A) unmodified opinion. (B) disclaim an opinion. (C) qualify their opinion or issue an adverse opinion. (D) consider more thoroughly the client's going concern status.

Upon the advice of its auditors, Smith Company changed the method of computing depreciation from the straight-line method to an accelerated method with a material effect upon the financial statements. The auditors' report: (A) should be a standard unmodified report. (B) should contain modification of the opinion paragraph. (C) must be qualified for the accounting change. (D) should include an additional emphasis-of-matter paragraph highlighting the accounting change.

(D) should include an additional emphasis-of-matter paragraph highlighting the accounting change.

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 and pervasive. What type of audit report should be used?

Adverse

For each of the following brief scenarios, assume that you are reporting on a client's financial statements. Select the type(s) of opinion (per below) possible for the scenario. In addition: • Unless stated otherwise, assume the matter involved is material. If the problem doesn't tell you whether a misstatement pervasively misstates the financial statements or doesn't list a characteristic that indicates pervasiveness, two reports may be possible (i.e., replies 6 to 9). • Do not read more into the circumstances than what is presented. • Do not consider an auditor discretionary circumstance for modification of the audit report unless the situation explicitly suggests that the auditor wishes to emphasize a particular matter. Types of Opinion 1. Unmodified—standard. 2. Unmodified with an emphasis-of-matter paragraph. 3. Qualified. 4. Adverse. 5. Disclaimer. 6. Unmodified with an emphasis-of-matter paragraph or disclaimer. 7. Qualified or adverse. 8. Qualified or disclaimer. 9. Adverse or disclaimer. 10. Other. * Note that this simulation has more parts than one would expect in a particular CPA exam simulation. We present it to provide examples of many types of reporting situations in one problem. Types of opinion may be used once, more than once, or not at all.

1. 7 A company has not followed generally accepted accounting principles in the recording of its leases 2. 1 A company has not followed generally accepted accounting principles in the recording of its leases. The amounts involved are immaterial 3. 7 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 4. 2 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. 5. 7 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. 6. 1 A client changed the depreciation life of certain assets from 10 years to 12 years. The auditor concurs with the change 7. 3 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 8. 1 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 9. 1 A client changed the salvage value of certain assets from 5 percent to 10 percent of original costs. The auditor concurs with the change 10. 1 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 11. 6 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. 12. 4 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 13. 1 An auditor reporting on group financial statemnts 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. 14. 10 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 15. 8 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. 16. 1 An auditor was hired after year-end and was unable to observe the counting of the year-end inventory. However, she was able to apply other procedures and determined that ending inventory and related information was properly stated. 17. 8 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. 18. 3 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 statemetns are prevasively misstated, they may be materially misstated. The client refuses to disclose the payoffs in a note to the financial statements. 19. 1 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 estimatble. Although no adjusting entry has been made, the client has provided a note to the financial statements that describes that matter in detail. 20. 7 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 statemenst that describes the matter in detail and includes $2,000,000 estimate in that note. 21. 10 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.) 22. 1 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.) 23. 2 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. 24. 7 A client's financial statements follow GAAP except that they do not include a note on a significant related party transaction

tems 1 through 5 present various independent factual situations an auditor might encounter in conducting an audit. For each situation, assume: • The auditor is independent. • The auditor previously expressed an unmodified opinion on the prior year's financial statements. • Only single-year (not comparative) statements are presented for the current year. • The conditions for an unmodified opinion exist unless contradicted in the factual situations. • The conditions stated in the factual situations are material. • No report modifications are to be made except in response to the factual situation. List A represents the types of opinions the auditor ordinarily would issue and List B represents the report modifications (if any) that would be necessary. Select as the best answer for each situation (items 1 through 5) the type of opinion and alterations, if any, the auditor would normally select. Replies may be selected once, more than once, or not at all. List A: Types of Opinions A. Unmodified B. Qualified C. Adverse D. Disclaimer E. Qualified or adverse F. Qualified or disclaimer G. Disclaimer or adverse List B: Report Alteration H. Add an emphasis-of-matter paragraph—prior to opinion paragraph. I. Add an emphasis-of-matter paragraph—after opinion paragraph. J. Add a basis for modification paragraph—prior to opinion paragraph. K. Add a basis for modification paragraph—after opinion paragraph. L. Modifications other than addition of a paragraph. M. Issue standard report without alteration. 1. In auditing the long-term investments account, an auditor is unable to obtain audited financial statements for an investee located in a foreign country. The auditor concludes that sufficient appropriate audit evidence regarding this investment cannot be obtained. 2. Due to recurring operating losses 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. However, the financial statement disclosures concerning these matters are adequate. The auditor has decided not to issue a disclaimer of opinion. 3. A group auditor decides to take responsibility for the owrk of a component CPA, who audited wholly owned subsidiary represent 17 percent and 18 percent, respectively, of the total assets and revenues of the entity being audited. 4. An entity changes its depreciation method for production equipment from straight-line to a units-of-production method based on hours of utilizaion. The auditor concurs with the change, although it has a material effect on the comparability of the entity's financial statements 5. An entity discloses certain lease obligations in the notes to the financial statements. The auditor believes that the failure to capitalize theese leases is a departure from generally accepted accounting principles and, although the possible effects on the financial statements of the misstatements is material, they could not be pervasive.

1. In auditing the long-term investments account, an auditor is unable to obtain audited financial statements for an investee located in a foreign country. The auditor concludes that sufficient appropriate audit evidence regarding this investment cannot be obtained. **F. Qualified or disclaimer; ** J. Add a basis for modification paragraph—prior to opinion paragraph. 2. Due to recurring operating losses 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. However, the financial statement disclosures concerning these matters are adequate. The auditor has decided not to issue a disclaimer of opinion. ** A. Unmodified; ** I. Add an emphasis-of-matter paragraph—after opinion paragraph. 3. A group auditor decides to take responsibility for the owrk of a component CPA, who audited wholly owned subsidiary represent 17 percent and 18 percent, respectively, of the total assets and revenues of the entity being audited. **A. Unmodified; **M. Issue standard report without alteration. 4. An entity changes its depreciation method for production equipment from straight-line to a units-of-production method based on hours of utilizaion. The auditor concurs with the change, although it has a material effect on the comparability of the entity's financial statements ** A. Unmodified; ** I. Add an emphasis-of-matter paragraph -after opinion paragraph 5. An entity discloses certain lease obligations in the notes to the financial statements. The auditor believes that the failure to capitalize these leases is a departure from generally accepted accounting principles and, although the possible effects on the financial statements of the misstatements is material, they could not be pervasive. ** B. Qualified; ** J. Add a basis for modification paragraph—prior to opinion paragraph.

A client changed the method it uses to calculate postemployment 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.

1. 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.)

1. Unmodified—standard.

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.

1. Unmodified—standard.

A company has not followed generally accepted accounting principles in the recording of its leases. The amounts involved are immaterial.

1. 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.

1. Unmodified—standard.

An auditor was hired after year-end and was unable to observe the counting of the year-end inventory. However, she was able to apply other procedures and determined that ending inventory and related information are properly stated.

1. Unmodified—standard.

In auditing the long-term investments account of a new client, an 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 the matter in detail.

1. Unmodified—standard.

An auditor discovered that a client made illegal political 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.

3. Qualified.

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.

4. Adverse.

In auditing the long-term investments account of a new client, an 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 the $2,000,000 estimate in that note.

7. Qualified or adverse.

An auditor discovered that a client made illegal political 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 a note to the financial statements to describe the illegal payments and has stated that the amounts of the payments are not determinable.

8. 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.

8. Qualified or disclaimer.

Jones, CPA, accepts a new client late in Year 5 and therefore had no opportunity to observe the physical inventory taken at December 31, Year 4. Jones found it impossible to obtain evidence by other auditing procedures as to the beginning inventories for Year 5. Jones observed the physical inventory at December 31, Year 5 and completed the audit satisfactorily. The report to be issued should: a. be unmodified as to the balance sheet and with a disclaimer of opinion as to the income statement and the statement of cash flows. b. be unmodified. c. be qualified as to all of the statements. d. be a disclaimer of opinion.

The PCAOB audit report includes an additional paragraph indicating: a. auditors also have issued a report on the client's internal control over financial reporting b. more detailed discussion of the responsibility of auditors in PCAOB audit c. auditors are independent of client and board of directors

The audit report should be signed with the name of: a. CPA firm b. Individual partner in charge of the audit c. managing partner of firm

Your audit of the Abbox Co. reveals that the firm's poor financial condition creates substantial doubt about its ability to continue as a going concern. Assuming that the financial statements have otherwise been prepared in accordance with generally accepted accounting principles and do include proper presentation of the matter, what disclosure should you make of the company's precarious financial position? a. You should issue an unmodified opinion, but use an emphasis-of-matter paragraph to direct the reader's attention to the poor financial condition of the company as described in the financial statements and the notes. b. You need not insist on any particular disclosure, since the company's poor financial condition is clearly indicated by the financial statements themselves. c. You should issue an adverse opinion on the financial statements. d. You should provide adequate disclosure and appropriately qualify your opinion because of the uncertainty.

Match the audit report with its description. a. Make reference to component auditors b. Make no reference to component auditors 1. Group auditor takes full responsibility for the entire audit 2. Shared responsibility opinion between the group auditor and the component auditor

A - 2, B - 1

Which of the following will result in emphasis-of-matter as to consistency in a nonpublic company auditor's report, regardless of whether the item is fully disclosed in the financial statements? A change from an unacceptable accounting principle to a generally accepted one. Correction of an immaterial error not involving a change in accounting principle. A change in accounting estimate. A change in classification.

A change from an unacceptable accounting principle to a generally accepted one.

Which of the following accounting changes requires an emphasis-of-matter paragraph regarding consistency in a nonpublic company auditors' report? A change in the estimated useful lives of a class of fixed assets. A write-off of a patent because future benefits do not appear to exist. A change from the straight-line method of depreciation to an accelerated method for a class of fixed assets. A change in calculating bad debt expense from one percent to two percent of credit sales.

A change from the straight-line method of depreciation to an accelerated method for a class of fixed assets.

Which of the following accounting changes requires an emphasis-of-matter paragraph regarding consistency in a nonpublic company auditors' report? A change in calculating bad debt expense from one percent to two percent of credit sales. A write-off of a patent because future benefits do not appear to exist. A change from the straight-line method of depreciation to an accelerated method for a class of fixed assets. A change in the estimated useful lives of a class of fixed assets.

A change from the straight-line method of depreciation to an accelerated method for a class of fixed assets.

Which of the following ordinarily involves the addition of an emphasis-of-matter paragraph to an audit report of a nonpublic company? A consistency modification. An adverse opinion. A qualified opinion. Part of the audit has been performed by component auditors.

A consistency modification.

Which of the following ordinarily involves the addition of an emphasis-of-matter paragraph to an audit report of a nonpublic company? Multiple Choice A consistency modification. An adverse opinion. A qualified opinion. Part of the audit has been performed by component auditors.

A consistency modification.

Which of the following ordinarily involves the addition of an emphasis-of-matter paragraph to an audit report? A consistency modification. An adverse opinion. A qualified opinion. Part of the audit has been performed by component auditors.

A consistency modification.

Which of the following ordinarily involves the addition of an emphasis-of-matter paragraph to an audit report?

A consistency modification. (A consistency modification results in an emphasis-of-matter paragraph. Qualified and adverse opinions include a basis for modification paragraph. When a report refers to component auditors no additional paragraph is added.)

Which of the following is least likely to result in inclusion of an additional paragraph being added to an audit report? The company is a component of a larger business enterprise. An unusually important significant event. A decision not to confirm accounts receivable. A risk or uncertainty.

A decision not to confirm accounts receivable.

Which of the following is least likely to result in inclusion of an additional paragraph being added to an audit report? Multiple Choice The company is a component of a larger business enterprise. An unusually important significant event. A decision not to confirm accounts receivable.

A decision not to confirm accounts receivable.

Which of the following is least likely to result in inclusion of an emphasis-of-matter paragraph in an audit report? The company is a component of a larger business enterprise. An unusually important significant event. A decision not to confirm accounts receivable. A risk or uncertainty.

A decision not to confirm accounts receivable.

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. (An emphasis-of-matter paragraph is appropriate when an auditor wishes to emphasize a matter concerning the financial statements, but not a matter concerning the scope of the audit engagement. Accordingly, answer (3) is not a situation in which an emphasis-of-matter paragraph is appropriate since confirming accounts receivable relates to the scope of the audit.)

An audit client has refused to allow the auditors to perform a generally accepted auditing procedure and there are no other effective alternate procedures available. The circumstance would normally result in the issuance of: An adverse opinion. A disclaimer of opinion. A standard unmodified opinion with a qualified scope paragraph. An unmodified report with an emphasis of matter paragraph.

A disclaimer of opinion.

Inventory is valued at sales prices which the auditors find, although reasonable, different from the lower of cost or market valuation system.

A qualified opinion/ An adverse opinion.

Substantial doubt about the client's ability to continue as a going concern exist. This substantial doubt is not properly disclosed in the financial statement notes. The auditor will not issue a disclaimer of opinion.

A qualified opinion/ An adverse opinion.

The financial statements reflect a change from one generally accounting principles to another generally accepted accounting principle. The auditor does not consider the new principle preferable to the previous one.

A qualified opinion/ An adverse opinion.

When an adverse opinion is expressed on the financial statements of a nonpublic company, the opinion paragraph should include a direct reference to: A note to the financial statements which discusses the basis for the opinion. The consistency in the application of generally accepted accounting principles. A separate basis for modification paragraph (section). The auditor's responsibility section of the audit report which discusses the basis for the opinion rendered.

A separate basis for modification paragraph (section).

Doe, an independent auditor, was engaged to perform an audit of the financial statements of Ally Incorporated one month after its fiscal year had ended. Although the inventory count was not observed by Doe, and accounts receivable were not confirmed by direct communication with debtors, Doe was able to obtain sufficient appropriate audit evidence by applying alternative auditing procedures. Doe's audit report will probably contain: An "except for" qualification. A standard unmodified opinion. An unmodified opinion and an emphasis of matter paragraph. Either a qualified opinion or a disclaimer of opinion.

A standard unmodified opinion.

Which of the following is not explicitly included in an audit report for a nonpublic company? A statement that the auditor believes that the audit provides a reasonable basis for expressing negative assurance. A statement that the auditor's responsibility is to express an opinion on the financial statements. A statement that the financial statements are the responsibility of management. A title with the word "independent."

A statement that the auditor believes that the audit provides a reasonable basis for expressing negative assurance.

Type of Report: A material misstatement is considered pervasive.

Adverse

Type of Report: The client has elected to not follow GAAP.

Adverse

Which of the following is not explicitly included in an audit report for a nonpublic company? A statement that the auditor believes that the audit provides a reasonable basis for expressing negative assurance. A statement that the financial statements are the responsibility of management. A title with the word "independent." A statement that the auditor's responsibility is to express an opinion on the financial statements.

A statement that the auditor believes that the audit provides a reasonable basis for expressing negative assurance.

Type of Report: The financial statements contain a material and pervasive departure from generally accepted accounting principles.

Adverse

An audit client has refused to allow the auditors to perform a generally accepted auditing procedure. The circumstance would normally result in the issuance of: A. A disclaimer of opinion. B. An adverse opinion. C. An "except for" qualification of the report. D. An unqualified report with explanatory language.

A. A disclaimer of opinion.

Ray, an independent auditor, was engaged to perform an audit of the financial statements of Zena Incorporated one month after its fiscal year had ended. Although the inventory count was not observed by Ray, the auditors were able to obtain sufficient appropriate audit evidence by applying alternative auditing procedures. Rays audit report will probably contain: A. A standard unmodified opinion. B. An unmodified opinion and an emphasis-of-matter paragraph. C. Either a qualified opinion or a disclaimer of opinion. D. An "except for" qualification.

A. A standard unmodified opinion.

Doe, an independent auditor, was engaged to perform an audit of the financial statements of Ally Incorporated one month after its fiscal year had ended. Although the inventory count was not observed by Doe, and accounts receivable were not confirmed by direct communication with debtors, Doe was able to gain satisfaction by applying alternative auditing procedures. Doe's audit report will probably contain: A. A standard unqualified opinion. B. An unqualified opinion and an explanatory paragraph. C. Either a qualified opinion or a disclaimer of opinion. D. An "except for" qualification.

A. A standard unqualified opinion.

¨GAAP departures that are material and pervasive ¨Change in accounting principles where auditors disagree and they are material and pervasive

Adverse

Which of the following is not explicitly included in an audit report for a nonpublic company? A. A statement that he auditor believes that his or her audit provides a reasonable basis for expressing negative assurance. B. A statement that the auditor's responsibility is to express an opinion on the financial statements. C. A statement that the financial statements in the report are the responsibility of management. D. A title with the word "independent."

A. A statement that he auditor believes that his or her audit provides a reasonable basis for expressing negative assurance

Which of the following is not explicitly included in an audit report for a nonpublic company? A. A statement that the auditor believes that the audit provides a reasonable basis for expressing negative assurance. B. A statement that the auditor's responsibility is to express an opinion on the financial statements. C. A statement that the financial statements are the responsibility of management. D. A title with the word "independent."

A. A statement that the auditor believes that the audit provides a reasonable basis for expressing negative assurance.

The Rotter Company changed accounting principles in 20X4 from those followed in 20X3. The auditor believes that the new principles are not in conformity with GAAP, and therefore that the 20X4 financial statements are misleading. The change (including its dollar effect) has been described in the notes to the 20X4 statements, which are being presented by themselves. Under these circumstances, in reporting on the 20X4 financial statements, the auditor should: A. Express an adverse opinion with an explanatory paragraph disclosing the reason (the accounting change) for the opinion. B. Express an unqualified opinion with an explanatory paragraph and disclose the accounting change from 20X3 and its effect on the financial statements. C. Disclaim an opinion and explain all of the reasons therefore. D. Express an adverse opinion regarding the 20X4 financial statements, without an explanatory paragraph disclosing the reason therefore since it will be included in the notes to the statements.

A. Express an adverse opinion with an explanatory paragraph disclosing the reason (the accounting change) for the opinion.

A scope restriction is least likely to result in a(an):

Adverse Opinion

The Rotter Company, a nonpublic company, changed accounting principles in 20X4 from those followed in 20X3. The auditor believes that the new principles are not in conformity with GAAP, and therefore that the 20X4 financial statements are misleading due to pervasive misstatements. The change (including its dollar effect) has been described in the notes to the 20X4 statements. Under these circumstances, in reporting on the 20X4 financial statements, the auditor should: A. Express an adverse opinion with the basis for modification paragraph disclosing the reason (the accounting change) for the opinion. B. Express an unmodified opinion with an emphasis-of-matter paragraph and disclose the accounting change from 20X3 and its effect on the financial statements. C. Disclaim an opinion and explain all of the reasons therefore. D. Express an adverse opinion regarding the 20X4 financial statements, without a basis for modification paragraph since the reason will be included in the notes to the statements.

A. Express an adverse opinion with the basis for modification paragraph disclosing the reason (the accounting change) for the opinion.

The auditors include an emphasis-of-matter paragraph in a nonpublic company audit report with an unmodified opinion in order to emphasize that the entity being reported upon is a subsidiary of another business enterprise. The inclusion of this paragraph: A. Is appropriate and would not negate the unmodified opinion. B. Is considered a qualification of the opinion. C. Is a violation of generally accepted reporting standards if this information is disclosed in notes to the financial statements. D. Necessitates a revision of the opinion paragraph to include the phrase "with the foregoing explanation."

A. Is appropriate and would not negate the unmodified opinion.

A basis for modification paragraph in the audit of the financial statements of a nonpublic company: A. Is only included with qualified, adverse, or disclaimers of opinion. B. Is presented only in audit reports with unmodified opinions. C. Has a section title: Emphasis-of-Matter. D. Must be included in all nonpublic company audit reports.

A. Is only included with qualified, adverse, or disclaimers of opinion.

Which of the following best describes the reference to the expression "taken as a whole" in the fourth generally accepted auditing standard of reporting? A. It applies equally to a complete set of financial statements and to each individual financial statement. B. It applies only to a complete set of financial statements. C. It applies equally to each item in each financial statement. D. It applies equally to each material item in each financial statement.

A. It applies equally to a complete set of financial statements and to each individual financial statement.

If the principal auditor decides to make reference to the other auditor's audit, the introductory paragraph must specifically indicate the: A. Magnitude of the portion of the financial statements examined by the other auditor. B. Name of the other auditor. C. Name of the consolidated subsidiary examined by the other auditor. D. Type of opinion expressed by the other auditor.

A. Magnitude of the portion of the financial statements examined by the other auditor.

An auditor has been asked to report on the balance sheet of Kane Company but not on the other basic financial statements. The auditor will have access to all information underlying the basic financial statements. Under these circumstances, the auditor: A. May accept the engagement because such engagements merely involve limited reporting objectives. B. May accept the engagement but should disclaim an opinion because of an inability to apply the procedures considered necessary. C. Should refuse the engagement because there is a client-imposed scope limitation. D. Should refuse the engagement because of a departure from generally accepted auditing standards.

A. May accept the engagement because such engagements merely involve limited reporting objectives.

An auditor has been asked to report on the balance sheet of Kane Company but not on the other basic financial statements. The auditor will have access to all information underlying the basic financial statements. Under these circumstances, the auditor: A. May accept the engagement. B. May accept the engagement but must disclaim an opinion because of an inability to apply the procedures considered necessary. C. Should refuse the engagement because there is a client-imposed scope limitation. D. Should refuse the engagement because of a departure from generally accepted auditing standards.

A. May accept the engagement.

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.

A client has changed the salvage values of a number of its fixed assets. The auditors believe that the salvage values are realistic. The appropriate report on the financial statements is: A. Standard unqualified. B. Unqualified with explanatory language as to consistency. C. Qualified for consistency. D. Disclaimer.

A. Standard unqualified.

A client has changed the salvage values of a number of its fixed assets. The auditors of the public company believe that the revised salvage values are realistic. The appropriate report on the financial statements is: A. Standard unqualified. B. Unqualified with explanatory language as to consistency. C. Qualified for consistency. D. Disclaimer.

A. Standard unqualified.

Which of the following would be most likely to be an appropriate addressee for an audit report? A. The shareholders of the corporation whose financial statements were examined. B. A third party who requested that a copy of the audit report be sent to her. C. The president of the corporation whose financial statements were examined. D. The chief financial officer.

A. The shareholders of the corporation whose financial statements were examined.

Which of the following would most likely be an appropriate addressee for an audit report? A. The shareholders of the corporation whose financial statements were examined. B. A third party who requested that a copy of the audit report be sent to her. C. The president of the corporation whose financial statements were examined. D. The chief financial officer.

A. The shareholders of the corporation whose financial statements were examined.

In which of the following circumstances would an auditor of financial statements be most likely to express an adverse opinion? A. The statements are not in conformity with FASB requirements regarding goodwill impairment. B. Information comes to the auditor's attention that raises substantial doubt about the entity's ability to continue in existence. C. The chief executive officer refuses the auditor access to minutes of board of directors' meetings. D. Tests of controls show that the entity's internal control is so poor that it cannot be relied upon.

A. The statements are not in conformity with FASB requirements regarding goodwill impairment.

In which of the following circumstances would an auditor of financial statements be most likely to express an adverse opinion? A. The statements are not in conformity with the FASB Statements regarding the capitalization of leases. B. Information comes to the auditor's attention that raises substantial doubt about the entity's ability to continue in existence. C. The chief executive officer refuses the auditor access to minutes of board of directors' meetings. D. Tests of controls show that the entity's internal control is so poor that it can not be relied upon.

A. The statements are not in conformity with the FASB Statements regarding the capitalization of leases.

An independent auditor has concluded that substantial doubt remains about a nonpublic client's ability to continue as a going concern, but the client's financial statements have properly disclosed all of its solvency problems. The auditor would probably issue a(an): A. Unmodified opinion with an appropriate emphasis-of-matter paragraph. B. "Except for" qualified opinion. C. Standard unmodified opinion. D. Adverse opinion.

A. Unmodified opinion with an appropriate emphasis-of-matter paragraph.

A basis for modification paragraph for a nonpublic company is least likely to relate to which of the following types of opinion? A. Unmodified. B. Qualified. C. Adverse. D. Disclaimer.

A. Unmodified.

An independent auditor has concluded that a substantial doubt remains about a client's ability to continue as a going concern, but the client's financial statements have properly disclosed all of its solvency problems. The auditor would probably issue a(an): A. Unqualified opinion with an appropriate explanatory paragraph. B. "Except for" qualified opinion. C. Standard unqualified opinion. D. Adverse opinion.

A. Unqualified opinion with an appropriate explanatory paragraph.

An auditor's report on comparative financial statements should be dated as of the date of the: Issuance of the report. Accumulation of sufficient appropriate audit evidence. Last related-party transaction disclosed in the statements. Latest financial statements being reported on.

Accumulation of sufficient appropriate audit evidence.

Report Type: 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

Situation: A client omits a note disclosure related to significant accounting policies that the auditor believes to be fundamental to users' understanding of the financial statements.

Adverse

Situation: 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

Situation: 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 and pervasive.

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 and pervasive.

Adverse

Which of the following is least likely to be a critical audit matter in a public company audit report? A significant risk identified by the auditor. Matters relating to the company's accounting policies. An audit team member lacking experience in the client's industry. A related party transaction.

An audit team member lacking experience in the client's industry.

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 footnote to the financial statements. The body of the financial statements. The "summary of significant accounting policies" section of the financial statements.

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

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: Multiple Choice An emphasis-of-matter paragraph to the auditors' report. A footnote to the financial statements. The body of the financial statements.

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

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. (The auditor communicates through the auditors' report and therefore only answer (1) is correct. Note that the client will include a discussion of the related party transactions in a note to the financial statements.)

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: An unmodified opinion. A disclaimer of opinion. An "except for" opinion. An improper type of reporting.

An improper type of reporting

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: Multiple Choice An unmodified opinion. A disclaimer of opinion. An "except for" opinion. An improper type of reporting.

An improper type of reporting.

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: An unmodified opinion. A disclaimer of opinion. An "except for" opinion. An improper type of reporting.

An improper type of reporting.

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; Unmodified with Emphasis-of-Matter a. Yes Yes b. Yes No c. No Yes d. No No

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:

An improper type of reporting. (This phrase violates the fourth standard of reporting, because it does not give the reader of the report a clear-cut indication of the auditors' opinion. The phrase appears to modify the standard opinion paragraph, but is not forceful enough to constitute qualifying language.)

Substantial doubt about the client's ability to continue as a going concern exist. This substantial doubt is properly disclosed in the financial statement notes. The auditor will not issue a disclaimer of opinion.

An unmodified opinion with an additional paragraph (e.g., emphasis of a matter paragraph)./ An unmodified opinion with an additional paragraph (e.g., emphasis of a matter paragraph).

The auditors wish to emphasize in the report a subsequent event described in the notes to the financial statements.

An unmodified opinion with an additional paragraph (e.g., emphasis of a matter paragraph)./ An unmodified opinion with an additional paragraph (e.g., emphasis of a matter paragraph).

The financial statements reflect a change from one generally accounting principles to another generally accepted accounting principle. The auditor considers the new principle preferable to the previous one.

An unmodified opinion with an additional paragraph (e.g., emphasis of a matter paragraph)./ An unmodified opinion with an additional paragraph (e.g., emphasis of a matter paragraph).

The company changed the lives of some of its fixed assets—the auditor finds the new lives reasonable.

An unmodified opinion, standard form/ An unmodified opinion, standard form.

The scope of the auditors' examination is restricted and the auditor is able effectively to apply other procedures.

An unmodified opinion, standard form/ An unmodified opinion, standard form.

When performing an audit, the auditors gather evidence to obtain reasonable assurance that the statements are in conformity with GAAP

Audit Report

Which of the following would most likely be an appropriate addressee for an auditor's report? (In order of appropriateness)

Audit committee --> BOD --> Shareholders

Which of the following is not included in PCAOB Form AP? Name of each accounting firm whose work constituted at least 5% of total audit hours. Audit staff investments in each particular client. Aggregate participation of accounting firms whose individual work was less than 5% of total audit hours. The engagement partner for audits.

Audit staff investments in each particular client.

The auditors' report should be dated as of the date the: Report is delivered to the client. Auditors have accumulated sufficient appropriate evidence. Fiscal period under audit ends. Peer review of the working papers is completed.

Auditors have accumulated sufficient appropriate evidence.

The auditors' report should be dated as of the date the: Multiple Choice Report is delivered to the client. Auditors have accumulated sufficient appropriate evidence. Fiscal period under audit ends.

Auditors have accumulated sufficient appropriate evidence.

The auditors' report should be dated as of the date the:

Auditors have accumulated sufficient evidence (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.)

The auditors' report should be dated as of the date the: Report is delivered to the client. Auditors have accumulated sufficient evidence. Fiscal period under audit ends. Peer review of the working papers is completed.

Auditors have accumulated sufficient evidence.

Auditors who want to restrict the use of a nonpublic company's audit report to management, the board of directors and shareholders should: a. include an emphasis of matter paragraph describing the restriction b. include an other-matter paragraph describing the restriction c. modify audit opinion to restrict use of it

For a client who corrects a material misstatement in the prior year's FS and discloses the correction in the notes, auditors should issue: a. disclaimer opinion b. unmodified opinion with an emphasis of matter paragraph c. qualified opinion with emphasis of matter paragraph

If a client changes depreciation methods but the change is immaterial, the auditor should issue: a. Unmodified opinion with an emphasis of a matter paragraph b. Unmodified opinion c. Qualified opinion d. Disclaimer of opinion

Multiple uncertainties that cause the auditor to conclude it is not possible to form an opinion on the FS, the auditors should issue: a. adverse opinion b. disclaimer of opinion c. qualified opinion d. unmodified opinion

What is the objective of auditor reporting responsibilities with respect to consistency? a. To give assurance that adequate disclosure will be made so that there will be comparability of financial statements between companies in the same industry. b. To give assurance that users will be informed of the lack of comparability of financial statements between periods due to changes in accounting principles. c. To give assurance only that the same accounting principles have been applied to all similar transactions within each period presented. d. To give assurance that the comparability of financial statements between periods has not been materially affected by any type of change.

If an accounting change has no material effect on the financial statements in the current year, but the change is reasonably certain to have a material effect in later years, the change should be: A. Referred to in the auditor's report for the current year. B. Disclosed in the notes to the financial statements of the current year. C. Disclosed in the notes to the financial statements and referred to in the auditor's report for the current year. D. Treated as a subsequent event.

B. Disclosed in the notes to the financial statements of the current year.

If auditors have substantial doubt about a company's ability to continue as a going concern and management's disclosures are materially inadequate, the appropriate report is a(n): (Select all that apply) a. Disclaimer of opinion b. Adverse opinion c. Unmodified opinion with an emphasis of matter d. Qualified opinion

B, D (inadequate disclosure = departure from GAAP)

Which of the following will result in emphasis-of-matter as to consistency in a nonpublic company auditor's report, regardless of whether the item is fully disclosed in the financial statements? A. A change in accounting estimate. B. A change from an unacceptable accounting principle to a generally accepted one. C. Correction of an immaterial error not involving a change in accounting principle. D. A change in classification.

B. A change from an unacceptable accounting principle to a generally accepted one.

Which of the following will result in explanatory language as to consistency in the auditor's report, regardless of whether the item is fully disclosed in the financial statements? A. A change in accounting estimate. B. A change from an unacceptable accounting principle to a generally accepted one. C. Correction of an error not involving a change in accounting principle. D. A change in classification.

B. A change from an unacceptable accounting principle to a generally accepted one.

B. Accumulation of sufficient appropriate audit evidence.

An emphasis-of-matter paragraph for all but group audits should be included where in relation to the opinion paragraph? a. included in opinion paragraph b. before opinion paragraph c. following opinion paragraph

B. Disclosed in the notes to the financial statements of the current year.

CPA Firm A has performed most of the audit of Consolidated Company's financial statements and qualifies as the principal auditor. CPA Firm B did the remainder of the work. Firm A wishes to assume full responsibility for Firm B's work. Which of the following statements is correct? A. Such assumption of responsibility violates the profession's standards. B. In such circumstances, when appropriate requirements have been met, Firm A should issue a standard unqualified opinion on the financial statements. C. In such circumstances, when appropriate requirements have been met, Firm A should issue an unqualified opinion on the financial statements but should make appropriate reference to Firm B in the audit report. D. CPA firm A should normally qualify its audit report on the basis of the scope limitation involved when another CPA firm is involved.

B. In such circumstances, when appropriate requirements have been met, Firm A should issue a standard unqualified opinion on the financial statements.

When an auditor of financial statements has substantial doubt about an entity's ability to continue as a going concern because of the probable discontinuance of operations, the auditor most likely would express a qualified opinion if A. The effects of the adverse financial conditions likely will cause a bankruptcy filing. B. Information about the entity's ability to continue as a going concern is not disclosed. C. Management has no plans to reduce or delay future expenditures. D. Negative trends and recurring operating losses appear to be irreversible.

B. Information about the entity's ability to continue as a going concern is not disclosed.

When an auditor does not confirm material accounts receivable, but is satisfied by the application of alternative auditing procedures, she normally should: A. Issue an unmodified opinion, but disclose elsewhere in the report this departure from a customary procedure. B. Issue an unmodified opinion with no reference to this omission. C. Issue a qualified opinion or a disclaimer, depending on the materiality of the receivables. D. Issue an adverse opinion.

B. Issue an unmodified opinion with no reference to this omission.

When an auditor of financial statements does not confirm material accounts receivable, but is satisfied by the application of alternative auditing procedures, she normally should: A. Issue an unqualified opinion, but disclose elsewhere in the report this departure from a customary procedure. B. Issue an unqualified opinion with no reference to this omission but be prepared to defend the action. C. Issue a qualified opinion or a disclaimer, depending on the materiality of the receivables. D. Issue an adverse opinion.

B. Issue an unqualified opinion with no reference to this omission but be prepared to defend the action.

The fourth reporting standard requires the auditor's report to contain either an expression of opinion regarding the financial statements, taken as a whole, or an assertion to the effect that an opinion cannot be expressed. The objective of the fourth standard is to prevent: A. The CPA from reporting on one basic financial statement and not the others. B. Misinterpretations regarding the degree of responsibility that the auditor is assuming. C. The CPA from expressing different opinions on each of the basic financial statements. D. Management from reducing its final responsibility for the basic financial statements.

B. Misinterpretations regarding the degree of responsibility that the auditor is assuming.

An explanatory paragraph relating to a scope limitation in the audit of the financial statements of a nonpublic company should be placed A. After the opinion paragraph. B. Prior to the opinion paragraph. C. Either before or after the opinion paragraph. D. An audit report modified for a scope limitation does not include an explanatory paragraph.

B. Prior to the opinion paragraph.

When a client declines to disclose essential information in the financial statements or notes, the auditor of the financial statements should: A. Provide the information in the audit report, if practicable, and qualify the opinion because of a limitation on the scope of the audit. B. Provide the information in the audit report, if practicable, and qualify the opinion because of a departure from GAAP. C. Issue a disclaimer of opinion because the client has interfered with the auditor's function of assessing the adequacy of disclosure. D. Issue an unmodified opinion, but inform the reader by including the omitted information in the audit report.

B. Provide the information in the audit report, if practicable, and qualify the opinion because of a departure from GAAP.

A limitation on the scope of the audit sufficient to preclude an unqualified opinion will always result when management: A. Asks the auditor to report on the balance sheet and not on the other basic financial statements. B. Refuses to permit its lawyer to respond to the letter of audit inquiry. C. Discloses material related party transactions in the notes to the financial statements. D. Knows that confirmation of accounts receivable is not feasible.

B. Refuses to permit its lawyer to respond to the letter of audit inquiry.

Which of the following is least likely to result in explanatory language being added to an unqualified auditor's report on the financial statements of a client that sells jewelry through a retail store? A. A decision by the auditor to emphasize that the client is a part of a larger organization. B. Reliance placed upon a specialist to evaluate the diamonds. C. A change from FIFO to specific identification accounting for inventory. D. A question as to whether the client will be able to remain a going concern.

B. Reliance placed upon a specialist to evaluate the diamonds.

Which of the following is least likely to result in a qualification of the auditors' opinion due to a scope limitation? A. Scope limitations imposed by the client. B. Reliance placed upon the report of component auditors. C. Inability to obtain sufficient appropriate audit evidence. D. Inadequate accounting records.

B. Reliance placed upon the report of component auditors.

Which of the following will not result in qualification of the auditors' report due to a scope limitation? A. Restrictions imposed by the client. B. Reliance placed upon the report of other auditors. C. Inability to obtain sufficient competent evidential matter. D. Inadequacy in the accounting records.

B. Reliance placed upon the report of other auditors.

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).

The unmodified standard audit report of a nonpublic company does not explicitly state that: A. The financial statements are the responsibility of the company's management. B. The audit was conducted in accordance with accounting principles generally accepted in the United States of America. C. The auditors believe that the audit provides a reasonable basis for their opinion. D. An audit includes evaluating the appropriateness of accounting policies used.

B. The audit was conducted in accordance with accounting principles generally accepted in the United States of America.

If audited financial statements include a balance sheet and an income statement, but do not include a statement of cash flows: A. The auditors may still issue an unqualified opinion. B. The auditors should issue an "except for" qualification for the departure from generally accepted accounting principles. C. The auditors should issue an opinion "subject to" the information that would have been contained in the statement of cash flows. D. The auditors should refuse to issue an opinion on only the two financial statements.

B. The auditors should issue an "except for" qualification for the departure from generally accepted accounting principles.

Which of the following is least likely to be included in a public company audit report with an unqualified opinion? A. A section on critical matters. B. The name of the engagement partner. C. A title with the word "Independent." D. A basis for opinion paragraph.

B. The name of the engagement partner.

The management of Stanley Corporation has decided not to account for a material transaction in accordance with the provisions of a recent statement of the FASB. They have set forth their reasons in note "B" of the financial statements, which clearly demonstrates that due to unusual circumstances the financial statements would otherwise have been misleading. The auditors' report on the financial statements will probably contain a(an): A. Qualified opinion and an explanatory paragraph with a reference to note "B". B. Unqualified opinion and an explanatory paragraph. C. Adverse opinion and an explanatory paragraph. D. "Except for" opinion and an explanatory paragraph.

B. Unqualified opinion and an explanatory paragraph.

Which of the following is least likely to result in an emphasis-of-matter paragraph being added to an unmodified auditor's report on the financial statements of a nonpublic client that sells jewelry through a retail store? A. A decision by the auditor to emphasize that the client is a part of a larger organization. B. Use of an unacceptable method to value inventory with results that differ materially from GAAP. C. A change from FIFO to specific identification accounting for inventory. D. A question as to whether the client will be able to remain a going concern.

B. Use of an unacceptable method to value inventory with results that differ materially from GAAP.

A client company has changed its accounting practices during the year, materially affecting its financial statements so as to make them seriously misleading and not in conformity with generally accepted accounting principles. The CPAs examining these financial statements should: a. modify the opinion with respect to consistency, referring to explanatory notes of the financial statements to fulfill disclosure requirements. b. disclaim an opinion and give reasons. c. render an adverse opinion and give reasons. d. modify the opinion with respect to consistency and, in an emphasis-of-matter paragraph, explain the changes and their effects on the net income of the period.

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.

T or F: When a client omits notes to audited financial statements, the auditor should add an emphasis-of-matter section to the report indicating such omission and issue an unmodified report.

False

Auditors that are unable to obtain sufficient appropriate audit evidence can issue a(n): (Select all that apply) a. Unmodified opinion b. Adverse opinion c. Qualified opinion d. Disclaimer of opinion

C, D

Which of the following accounting changes requires explanatory language regarding consistency in the auditors' report? A. A change in the estimated useful lives of a class of fixed assets. B. A write-off of a patent because future benefits do not appear to exist. C. A change from the straight line method of depreciation to an accelerated method for a class of fixed assets. D. A change in calculating bad debt expense from one percent to two percent of credit sales.

C. A change from the straight line method of depreciation to an accelerated method for a class of fixed assets.

Which of the following accounting changes requires an emphasis-of-matter paragraph regarding consistency in a nonpublic company auditors' report? A. A change in the estimated useful lives of a class of fixed assets. B. A write-off of a patent because future benefits do not appear to exist. C. A change from the straight-line method of depreciation to an accelerated method for a class of fixed assets. D. A change in calculating bad debt expense from one percent to two percent of credit sales.

C. A change from the straight-line method of depreciation to an accelerated method for a class of fixed assets.

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.

When an adverse opinion is expressed on the financial statements of a nonpublic company, the opinion paragraph should include a direct reference to: A. A note to the financial statements which discusses the basis for the opinion. B. The auditor's responsibility section of the audit report which discusses the basis for the opinion rendered. C. A separate basis for modification paragraph (section). D. The consistency in the application of generally accepted accounting principles.

C. A separate basis for modification paragraph (section).

A scope restriction is least likely to result in a(an): A. Qualified opinion. B. Disclaimer of opinion. C. Adverse opinion. D. Standard unqualified opinion.

C. Adverse opinion.

T/F: A USA nonpublic company audit report indicates that the audit was performed in accordance with "generally accepted accounting principles."

False

Which of the following is least likely to be a critical audit matter in a public company audit report? A. A significant risk identified by the auditor. B. A related party transaction. C. An audit team member lacking experience in the client's industry. D. Matters relating to the company's accounting policies.

C. An audit team member lacking experience in the client's industry.

If principal auditors make no reference to other auditors whose work they have relied on as a part of the basis for their report, the principal auditors: A. Are not required to investigate the professional reputation of the other auditors. B. Are issuing an inappropriate report. C. Are assuming full responsibility for the work of the other auditors. D. Are issuing a qualified opinion.

C. Are assuming full responsibility for the work of the other auditors.

If group auditors make no reference to component auditors whose work they have relied on as a part of the basis for their report, the group auditors: A. Are not required to investigate the professional reputation of the component auditors. B. Are issuing an inappropriate report. C. Are assuming responsibility for the work of the component auditors. D. Are issuing a qualified opinion.

C. Are assuming responsibility for the work of the component auditors.

Which of the following is most accurate with respect to a CPA's responsibility in considering a going concern question on financial statement audits? A. Perform analytical procedures aimed particularly at assessing whether bankruptcy is probable. B. Issue a report with a "going concern" modification when failure is at least reasonably probable. C. Based on audit procedures performed, assess whether there is substantial doubt about the entity's ability to continue as a going concern. D. Determine that related uncertainties are properly disclosed and make no mention in the audit report.

C. Based on audit procedures performed, assess whether there is substantial doubt about the entity's ability to continue as a going concern.

After considering an entity's negative trends and financial difficulties, an auditor has substantial doubt about the entity's ability to continue as a going concern. The auditor's considerations relating to management's plans for dealing with the adverse effects of these conditions most likely would include management's plans to: A. Increase current dividend distributions. B. Reduce existing lines of credit. C. Increase ownership equity. D. Purchase assets formerly leased.

C. Increase ownership equity.

When financial statements are affected by a material departure from generally accepted accounting principles, the auditors should: A. Issue an unmodified opinion with a basis for modification paragraph. B. Withdraw from the engagement. C. Issue an "except for" qualification or an adverse opinion. D. Issue an "except for" qualification or a disclaimer of opinion.

C. Issue an "except for" qualification or an adverse opinion.

An auditor of financial statements believes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. In evaluating the entity's plans for dealing with the adverse effects of future conditions and events, the auditor most likely would consider, as a mitigating factor, the entity's plans to A. Repurchase the entity's stock at a price below its book value. B. Issue stock options to key executives. C. Lease rather than purchase operating facilities. D. Accelerate the due date of an existing mortgage.

C. Lease rather than purchase operating facilities.

Morgan, CPA, is the group auditor for a multinational corporation. Another CPA has examined and reported on the financial statements of a significant subsidiary of the corporation. Morgan is satisfied with the independence and professional reputation of the component auditor, as well as the quality of the component auditor's audit. With respect to Morgan's report on the consolidated financial statements, taken as a whole, Morgan: A. Must not refer to the audit of the component auditor. B. Must refer to the audit of the component auditor. C. May refer to the audit of the component auditor. D. May refer to the audit of the component auditor, in which case Morgan must include in the audit report on the consolidated financial statements a qualified opinion with respect to the audit of the component auditor.

C. May refer to the audit of the component auditor.

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

C. Qualified: No, Unmodified with Emphasis-of-Matter Yes

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. Qualified: No, Unmodified with Emphasis-of-Matter: Yes

An auditor of financial statements believes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. In evaluating the entity's plans for dealing with the adverse effects of future conditions and events, the auditor most likely would consider, as a mitigating factor, the entity's plans to: A. Repurchase the entity's stock at a price below its book value. B. Issue stock options to key executives. C. Refinance debt to lower loan payments. D. Accelerate the due date of an existing mortgage.

C. Refinance debt to lower loan payments.

Which of the following statements is correct with respect to explanatory paragraphs in reports on audits of the financial statements of nonpublic companies? A. They always precede the opinion paragraph. B. They always follow the opinion paragraph. C. Sometimes they precede and sometimes they follow the opinion paragraph. D. They always precede the scope paragraph.

C. Sometimes they precede and sometimes they follow the opinion paragraph.

Which of the following modifications of the auditors' report does not include an additional paragraph? A. The report is qualified because the financial statements contain a material departure from generally accepted accounting principles. B. The report includes an emphasis of a matter. C. The audit report of a nonpublic company indicates a division of responsibility between two CPA firms. D. The report is qualified because the scope of the auditors' work was limited.

C. The audit report of a nonpublic company indicates a division of responsibility between two CPA firms.

Which of the following is not a difference between the audit report of a nonpublic and public company? A. The nonpublic company report includes the word "Registered" in the title. B. The nonpublic company report refers to standards of the PCAOB. C. The nonpublic company report has an additional paragraph referring to the client's fraud prevention procedures. D. The nonpublic company report must include the city and state in which the report has been issued.

C. The nonpublic company report has an additional paragraph referring to the client's fraud prevention procedures.

Which of the following is not a difference between the audit report of a nonpublic and public company? A. The public company report includes the word "Registered" in the title. B. The public company report refers to standards of the PCAOB. C. The public company report has an additional paragraph referring to the client's fraud prevention procedures. D. The public company report is more likely to refer to a critical audit matter.

C. The public company report has an additional paragraph referring to the client's fraud prevention procedures.

The term "except for" in an audit report is: A. Used in an adverse opinion. B. No longer considered appropriate. C. Used in a qualified opinion. D. Used for an unmodified opinion when an emphasis-of-matter paragraph is added.

C. Used in a qualified opinion.

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.

If the auditors believe that related party transactions are not adequately described in the notes to the financial statements, they should: A. add an emphasis-of-matter paragraph to their unmodified opinion. B. consider more thoroughly the client's going concern status. C. qualify their opinion or issue an adverse opinion. D. disclaim an opinion.

C. qualify their opinion or issue an adverse opinion.

A client company has changed its accounting practices during the year, materially affecting its financial statements so as to make them seriously misleading and not in conformity with generally accepted accounting principles. The CPAs examining these financial statements should: A. disclaim an opinion and give reasons. B. modify the opinion with respect to consistency and, in an emphasis-of-matter paragraph, explain the changes and their effects on the net income of the period. C. render an adverse opinion and give reasons. D. modify the opinion with respect to consistency, referring to explanatory notes of the financial statements to fulfill disclosure requirements.

C. render an adverse opinion and give reasons.

Scenario: Predecessor auditors audited last year's financial statements and you audited the current year. You have decided not to ask the predecessor to reissue that audit report. Comparative financial statements are being issued on the two years.

Circumstance: Comparative F/S Type of Opinion(s): Unmodified Report Alteration: Other Alteration - No Paragraph Added

Scenario: A company changes from FIFO to LIFO for inventory valuation and you concur with the change. The change has an immaterial effect on the entity's financial statements this year, but it is expected to have a material effect in the future.

Circumstance: Consistency Type of Opinion(s): Unmodified Report Alteration: No alteration

T/F: If a company is faced with any uncertainty such as the prospect of a strike or the possible imposition of wage and price controls, the auditors should issue a qualified or adverse opinion.

False

Scenario: Your client has declined to depreciate its assets this year because the depreciation expense would reduce the year's small income to a loss.

Circumstance: Departure from GAAP Type of Opinion(s): Qualified / Adverse Report Alteration: Basis for Modification Paragraph Added (both)

Scenario: Your client is a defendant in a major lawsuit. It is probable that the company will experience a material loss due to the lawsuit, although it is impossible to calculate the likely amount. The financial statements include a note adequately describing the matter. You decide that a standard report is inappropriate.

Circumstance: EMPH (Auditor Discretionary Emphasis of Matter) Type of Opinion(s): Unmodified Report Alteration: Emphasis of Matter Paragraph Added

Scenario: A client's financial statements follow GAAP, but you wish to emphasize that the client is a subsidiary of Webster Corporation in the audit report.

Circumstance: EMPH (Auditor Discretionary Emphasis of Matter) Type of Opinion(s): Unmodified Report Alteration: Emphasis of Matter Paragraph Added

Scenario: Due to a very major lawsuit, you have substantial doubt about a client's ability to continue as a going concern for a reasonable period of time. The financial statement disclosures related to this lawsuit are adequate.

Circumstance: Going Concern Type of Opinion(s): Unmodified / Disclaimer Report Alteration: Basis for Modification Paragraph Added / Emphasis of Matter Paragraph Added

Scenario: You decide to take responsibility for the work of the component auditors 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.

Circumstance: Group Audit Type of Opinion(s): Unmodified Report Alteration: No alteration

Scenario: In auditing the long-term investments account of a new client, you are unable to obtain audited financial statements for the investee located in a foreign country. You conclude that sufficient appropriate audit evidence regarding this investment cannot be obtained.

Circumstance: Scope Limitation Type of Opinion(s): Qualified / Disclaimer Report Alteration: Basis for Modification Paragraph Added (both)

What's the difference between "component auditors" and a "predecessor auditor"?

Component: used as part of group audit Predecessor: fired auditor

When an auditor of a nonpublic company has concluded there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time beyond the date the financial statements will be released (1/26/X2), the auditor's responsibility includes: Preparing prospective financial information to verify whether management's plans can be effectively implemented. Projecting conditions and events from one year prior to this year's date (12/31/X0) to 12/31/X1. Issuing an adverse or negative assurance opinion, depending upon materiality, due to the possible effects on the financial statements. Considering the adequacy of disclosure about the entity's possible inability to continue as a going concern.

Considering the adequacy of disclosure about the entity's possible inability to continue as a going concern.

When an auditor of a nonpublic company has concluded there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time beyond the date the financial statements will be released (1/26/X2), the auditor's responsibility includes: Considering the adequacy of disclosure about the entity's possible inability to continue as a going concern. Preparing prospective financial information to verify whether management's plans can be effectively implemented. Projecting conditions and events from one year prior to this year's date (12/31/X0) to 12/31/X1. Issuing an adverse or negative assurance opinion, depending upon materiality, due to the possible effects on the financial statements.

Considering the adequacy of disclosure about the entity's possible inability to continue as a going concern.

The Basis for Opinion section should begin with a statement that the financial statements are the responsibility of management. (Correct or Incorrect)

Correct

The change in accounting principles should not be referred to in the opinion paragraph—delete that sentence. (Correct or Incorrect)

Correct

The report also must be addressed to the board of directors. (Correct or Incorrect)

Correct

The report should be dated as of February 12, the date on which sufficient appropriate audit evidence was obtained. (Correct or Incorrect)

Correct

FS disclosures regarding the firm's going concern status include all of the following except: a. pertinent conditions and events giving rise to substantial doubt b. management's evaluation and plan for dealing with the conditions c. possible discontinuance of operations d. audit procedures performed to identify and review going concern status

If the auditors indicate in the report that the opinion is based, in part, on the report of component auditors who were responsible for the audit of part of the total financial statement data, the auditors are: a. in effect qualifying the opinion. b. abrogating responsibility to those users who rely on the CPA firm's reputation as a basis for relying on the reported financial statements. c. taking complete responsible for the work of the other auditors. d. properly indicating a division of responsibility, and the report should further indicate in an appropriate quantitative form the proportionate responsibility being assumed by each set of auditors.

Publicly owned companies are required to include in their annual reports: a. statements of retained earnings for the last two years b. statements of cash flows for the last two years c. statements of income for the last two years d. balance sheets for each of the last two years

When an adverse opinion is expressed, the opinion paragraph should include a direct reference to: a. a note to the financial statements which discusses the basis for the opinion. b. the consistency or lack of consistency in the application of generally accepted accounting principles. c. the paragraph that describes management's responsibilities. d. a separate paragraph that discusses the basis for the opinion expressed.

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.

Which of the following is not included in PCAOB Form AP? A. The engagement partner for audits. B. Name of each accounting firm whose work constituted at least 5% of total audit hours. C. Aggregate participation of accounting firms whose individual work was less than 5% of total audit hours. D. Audit staff investments in each particular client.

D. Audit staff investments in each particular client.

D. Be applied on a basis consistent with those followed in the prior year.

If the predecessor auditors fail to reissue their audit report on comparative financial statements the successor auditors should: A. Express a qualified opinion on the comparative financial statements audited by the predecessor auditors. B. Reproduce the predecessor auditors' report and include it with the new set of financial statements. C. Have the client omit the comparative financial statements. D. Refer to the report of the predecessor auditors.

D. Refer to the report of the predecessor auditors.

When an auditor of a nonpublic company has concluded there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time beyond the date the financial statements will be released (1/26/X2), the auditor's responsibility includes: A. Preparing prospective financial information to verify whether management's plans can be effectively implemented. B. Projecting conditions and events from one year prior to this year's date (12/31/X0) to 12/31/X1. C. Issuing an adverse or negative assurance opinion, depending upon materiality, due to the possible effects on the financial statements. D. Considering the adequacy of disclosure about the entity's possible inability to continue as a going concern.

D. Considering the adequacy of disclosure about the entity's possible inability to continue as a going concern.

D. Each of the years in the two-year period.

Which of the following representations does an auditor make explicitly and which implicitly when issuing a standard unqualified opinion on a public company's financial statements? Conformity with PCAOB Standards (column A) Going Concern Status (column B) A. Explicitly Explicitly B. Implicitly Implicitly C. Implicitly Explicitly D. Explicitly Implicitly Option A Option B Option C Option D

D. Explicitly Implicitly

Which of the following representations does an auditor make explicitly and which implicitly when issuing a standard unqualified opinion on a public company's financial statements? Conformity with PCAOB Standards / Going Concern Status A. Explicitly Explicitly B. Implicitly Implicitly C. Implicitly Explicitly D. Explicitly Implicitly

D. Explicitly Implicitly

Which of the following is a general purpose financial reporting framework? A. Generally accepted auditing standards. B. Auditing Standards of the Public Company Accounting Oversight Board. C. International Standards of Auditing. D. International Financial Reporting Standards.

D. International Financial Reporting Standards.

Critical audit matters are included in a public company audit report with a(n): Adverse Opinion / Disclaimer of Opinion A. Yes Yes B. Yes No C. No Yes D. No No

D. No No

If the predecessor auditors do not reissue their audit report on comparative financial statements, the successor auditors should: A. Express a qualified opinion on the comparative financial statements audited by the predecessor auditors. B. Reproduce the predecessor auditors' report and include it with the new set of financial statements. C. Have the client omit the comparative financial statements. D. Refer to the report of the predecessor auditors.

D. Refer to the report of the predecessor auditors.

Under which of the following set of circumstances might the auditors disclaim an opinion? A. The financial statements contain a departure from generally accepted accounting principles, the effect of which is material. B. The group auditors decide to make reference to the report of component auditor who audited a subsidiary. C. There has been a material change between periods in the method of application of accounting principles. D. The auditors cannot observe ending inventory nor confirm accounts receivable and cannot obtain sufficient evidence using alternative procedures.

D. The auditors cannot observe ending inventory nor confirm accounts receivable and cannot obtain sufficient evidence using alternative procedures.

Which of the following is correct concerning a public company audit report with a disclaimer of opinion? A. It must include in a section on critical audit matters the circumstances that led to the disclaimer. B. The title of the Opinion section will be changed to Basis for Disclaimer of Opinion. C. It will ordinarily be issued in situations in which financial statements are materially and pervasively misstated. D. The paragraph describing the reason for the disclaimer will follow the opinion paragraph and will not include a title.

D. The paragraph describing the reason for the disclaimer will follow the opinion paragraph and will not include a title.

When reporting on comparative financial statements where the financial statements of the prior period have been examined by a predecessor auditor whose report is not presented, the successor auditor should indicate in the report: A. The reasons why the predecessor auditor's report is not presented. B. The identity of the predecessor auditor who examined the financial statements of the prior year. C. Whether the predecessor auditor's review of the current year's financial statements revealed any matter that might have a material effect on the successor auditor's opinion. D. The type of opinion expressed by the predecessor auditor.

D. The type of opinion expressed by the predecessor auditor.

When financial statements of a prior period are presented on a comparative basis with financial statements of the current period, the continuing auditor is responsible for: A. Expressing dual dated opinions. B. Updating the report on the previous financial statements only if there has not been a change in the opinion. C. Updating the report on the previous financial statements only if the previous report was qualified and the reasons for the qualification no longer exist. D. Updating the report on the previous financial statements regardless of the opinion previously issued.

D. Updating the report on the previous financial statements regardless of the opinion previously issued.

After performing all necessary procedures the predecessor auditors reissue a prior-period report on financial statements at the request of the client without revising the original wording. The predecessor auditors should: A. Delete the date of the report. B. Dual-date the report. C. Use the reissue date. D. Use the date of the previous report.

D. Use the date of the previous report.

Client-imposed restrictions significantly limit the scope of the auditors' procedures, and they are unable to obtain sufficient appropriate audit evidence. The possible effects on the financial statements of undetected misstatements, if any, could be both material and pervasive.

Disclaimer.

When there is a significant question about a company's ability to remain a going concern, the report issued is usually unqualified with an explanatory paragraph. True False

TRUE

Your audit of the Abbox Co. reveals that the firm's poor financial condition creates substantial doubt about its ability to continue as a going concern. Assuming that the financial statements have otherwise been prepared in accordance with generally accepted accounting principles and do include proper presentation of the matter, what disclosure should you make of the company's precarious financial position? A. You should provide adequate disclosure and appropriately qualify your opinion because of the uncertainty. B. You need not insist on any particular disclosure, since the company's poor financial condition is clearly indicated by the financial statements themselves. C. You should issue an adverse opinion on the financial statements. D. You should issue an unmodified opinion, but use an emphasis-of-matter paragraph to direct the reader's attention to the poor financial condition of the company as described in the financial statements and the notes.

D. You should issue an unmodified opinion, but use an emphasis-of-matter paragraph to direct the reader's attention to the poor financial condition of the company as described in the financial statements and the notes.

4. "and subject to the accounting change described in the Emphasis of Matter paragraph"

Delete the text.

Under what circumstance(s) is an adverse opinion issued?

Departures from GAAP (severe, pervasive, etc.)

Disclaimer

Report Type: 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 F.S. of undetected misstatements, if any, could be both material & pervasive.

Disclaimer

Situation: A client does not count its year-end inventory. The auditors are unable to obtain sufficient appropriate audit evidence related to inventory and they consider inventory as representing an extremely substantial proportion of the financial statements.

Disclaimer

Type of Report: 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.

Disclaimer

When the auditor is unable to determine the amounts associated with noncompliance with a law by client personnel due to a scope limitation, the auditor should issue a(an): Disclaimer of opinion. Unmodified opinion with a separate emphasis-of-matter paragraph. Standard unmodified opinion. Adverse opinion.

Disclaimer of opinion.

When the auditor is unable to determine the amounts associated with noncompliance with a law by client personnel, the auditor should issue a(an): Disclaimer of opinion. Adverse opinion. Unmodified opinion with a separate emphasis of matter paragraph. Standard unmodified opinion.

Disclaimer of opinion.

Changes in accounting estimates ______ result in an explanatory paragraph.

Do not

Situation: 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.

EMP

Draves Company owns substantial properties that have appreciated significantly in value since the date of purchase. The properties were appraised and are reported in the balance sheet at the appraised values (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

Report Type: Draves Company owns substantial properties that have appreciated significantly in value since the date of purchase. The properties were appraised and are reported in the balance sheet at the appraised values (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

Report Type: Slade Company has material investments in stocks of subsidiary companies. Stocks ofthe subsidiary companies are actively traded in the market. Management insists that allinvestments be carried at original costs, and the CPA firm is satisfied that the originalcosts are accurate. The CPA firm believes that the client will never ultimately realize asubstantial portion of the investments because the market value is much lower than thecost; the client has fully disclosed the facts in notes to the financial statements.

Either qualified or adverse

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

Report Type: 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

When there is significant doubt as to the ability to continue as a going concern, a(n) _________ paragraph may be added.

Emphasis of matter

T/F: The auditors should generally issue a qualified opinion if circumstances involved make it impossible for them to observe the physical inventory or to confirm accounts receivable, even when sufficient appropriate audit evidence has been gathered using alternate procedures.

False

Which of the following is not an acceptable financial reporting framework? Cash basis. International accounting standards basis. Generally accepted auditing standards basis. Tax basis.

Generally accepted auditing standards basis.

When auditors have concern about a company's ability to continue as a(n) __________ __________, they should consider whether management's plans for dealing with the conditions are likely to mitigate the problem.

Going concern

"The accompanying consolidated FS have been prepared assuming the company will continue as a going concern, but there is substantial doubt about its ability to continue as a going concern."

Going concern opinion

Which of the following is a general purpose financial reporting framework? Auditing Standards of the Public Company Accounting Oversight Board. International Financial Reporting Standards. International Standards of Auditing. Generally accepted auditing standards.

International Financial Reporting Standards.

When financial statements are affected by a material departure from generally accepted accounting principles, the auditors should: Issue an unmodified opinion with a basis for modification paragraph. Withdraw from the engagement. Issue an "except for" qualification or an adverse opinion. Issue an "except for" qualification or a disclaimer of opinion.

Issue an "except for" qualification or an adverse opinion.

When financial statements are affected by a material departure from generally accepted accounting principles, the auditors should: Issue an "except for" qualification or a disclaimer of opinion. Issue an "except for" qualification or an adverse opinion. Withdraw from the engagement. Issue an unmodified opinion with a basis for modification paragraph.

Issue an "except for" qualification or an adverse opinion.

When an auditor does not confirm material accounts receivable, but is satisfied by the application of alternative auditing procedures, she normally should: Issue an unmodified opinion, but disclose elsewhere in the report this departure from a customary procedure. Issue an unmodified opinion with no reference to this omission. Issue a qualified opinion or a disclaimer, depending on the materiality of the receivables. Issue an adverse opinion.

Issue an unmodified opinion with no reference to this omission.

When an auditor does not confirm material accounts receivable, but is satisfied by the application of alternative auditing procedures, she normally should: Issue an adverse opinion. Issue an unmodified opinion, but disclose elsewhere in the report this departure from a customary procedure. Issue an unmodified opinion with no reference to this omission. Issue a qualified opinion or a disclaimer, depending on the materiality of the receivables

Issue an unmodified opinion with no reference to this omission.

Which of the following is not correct relating to an audit report for a public company? It includes the term "PCAOB Compliant" in the title. It refers to standards of the Public Company Accounting Oversight Board. It must include the city and state in which it was issued. It includes an additional paragraph indicating that the auditors have also issued a report on the client's internal control over financial reporting.

It includes the term "PCAOB Compliant" in the title.

What date is ordinarily used to date an audit report?

Last day of field work

What are the types of audit reports for uncertainties?

Lawsuits: -Unmodified with Emphasis of Matter -Disclaimer

An auditor has been asked to report on the balance sheet of Kane Company but not on the other basic financial statements. The auditor will have access to all information underlying the basic financial statements. Under these circumstances, the auditor: Should refuse the engagement because there is a client-imposed scope limitation. May accept the engagement. May accept the engagement but must disclaim an opinion because of an inability to apply the procedures considered necessary. Should refuse the engagement because of a departure from generally accepted auditing standards.

May accept the engagement.

Morgan, CPA, is the group auditor for a multinational corporation. Another CPA has examined and reported on the financial statements of a significant subsidiary of the corporation. Morgan is satisfied with the independence and professional reputation of the component auditor, as well as the quality of the component auditor's audit. With respect to Morgan's report on the consolidated financial statements, taken as a whole, Morgan: May refer to the audit of the component auditor. Must refer to the audit of the component auditor. Must not refer to the audit of the component auditor. May refer to the audit of the component auditor, in which case Morgan must include in the audit report on the consolidated financial statements a qualified opinion with respect to the audit of the component auditor.

May refer to the audit of the component auditor.

When an auditor issues an unqualified report on financial statements, but adds an emphasis of a matter paragraph to the report, which, if any, paragraphs to the report are modified? Introductory: YES NO Scope: YES NO Opinion: YES NO

NO NO NO

When the auditor of a nonpublic company issues an adverse opinion an explanatory paragraph is added. In addition, which, if any, paragraphs to the report are modified? Introductory: YES NO Scope: YES NO Opinion: YES NO

NO NO YES

When an auditor issues a qualified report on financial statements due to a scope limitation an explanatory paragraph is added. In addition, which, if any, paragraphs to the report are modified? Introductory: YES NO Scope: YES NO Opinion: YES NO

NO YES YES

A change in the estimated service lives of previously recorded plant assets based on newly acquired information. Should the audit report include an emphasis-of-matter paragraph on consistency?

A change to including the employer's share of FICA taxes as "Retirement benefits" on the income statement. This information was previously included with "Other taxes." (Yes or No)

A change to including the employer's share of FICA taxes as "Retirement benefits" on the income statement. This information was previously included with "Other taxes." Should the audit report include an emphasis-of-matter paragraph on consistency?

Should an emphasis-of-matter paragraph on consistency be included in the report? A change in the estimated service lives of previously recorded plant assets based on newly acquired information.

Should an emphasis-of-matter paragraph on consistency be included in the report? A change to including the employer's share of FICA taxes as "Retirement benefits" on the income statement. This information was previously included with "Other taxes."

What type or types of audit opinion are appropriate when financial statements are materially and pervasively misstated: Qualified Adverse Yes Yes Yes No No Yes No No

No Yes

What type or types of audit opinion are appropriate when financial statements are materially and pervasively misstated? Qualified Adverse Yes Yes Yes No No Yes No No

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 Unmodified with Emphasis-of-Matter Yes Yes Yes No No Yes No No

No Yes

Unmodified? Additional paragraph? A departure from GAAP.

No, yes

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. Not in accordance with generally accepted auditing standards. A qualification that lessens the collective responsibility of both CPA firms. An example of a dual opinion requiring the signatures of both auditors.

Not to be construed as a qualification, but rather as a division of responsibility between the two CPA firms.

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: Multiple Choice Not to be construed as a qualification, but rather as a division of responsibility between the two CPA firms. Not in accordance with generally accepted auditing standards. A qualification that lessens the collective responsibility of both CPA firms. An example of a dual opinion requiring the signatures of both auditors.

Not to be construed as a qualification, but rather as a division of responsibility between the two CPA firms.

Situation: An entity discloses certain lease obligations in the notes to the financial statements. The auditor believes that the failure to capitalize these leases is a departure from generally accepted accounting principles and, although the possible effects on the financial statements of the misstatements is material, they could not be pervasive.

Opinion: Qualified Report Alteration: Add a basis for modification paragraph—prior to opinion paragraph.

Situation: In auditing the long-term investments account, an auditor is unable to obtain audited financial statements for an investee located in a foreign country. The auditor concludes that sufficient appropriate audit evidence regarding this investment cannot be obtained.

Opinion: Qualified or Disclaimer Report Alteration: Add a basis for modification paragraph—prior to opinion paragraph.

Situation: 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. However, the financial statement disclosures concerning these matters are adequate. The auditor has decided not to issue a disclaimer of opinion.

Opinion: Unmodified Standard Report Alteration: Add an emphasis-of-matter paragraph—after opinion paragraph.

Situation: A group auditor decides to take responsibility for the work of a component CPA who audited a wholly owned subsidiary of the entity and issued an unmodified opinion. The total assets and revenues of the subsidiary represent 17 percent and 18 percent, respectively, of the total assets and revenues of the entity being audited.

Opinion: Unmodified Standard Report Alteration: Issue standard report without alteration.

Situation: An entity changes its depreciation method for production equipment from straight-line to a units-of-production method based on hours of utilization. The auditor concurs with the change, although it has a material effect on the comparability of the entity's financial statements.

Opinion: Unmodified Standard Report Alteration: Add an emphasis-of-matter paragraph—after opinion paragraph.

Option 2

What type or types of audit opinion are appropriate when financial statements are materially and pervasively misstated? Qualified Adverse (1) Yes Yes (2) Yes No (3) No Yes (4) No No Option 1 Option 2 Option 3 Option 4

Option 3

What type or types of audit opinion are appropriate when financial statements are materially and pervasively misstated? Qualified Adverse (1) Yes Yes (2) Yes No (3) No Yes (4) No No

Option 3

When the matter is properly disclosed in the financial statements of a nonpublic company, 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 Unmodified with Emphasis-of-Matter (1) Yes Yes (2) Yes No (3) No Yes (4) No No Option 1 Option 2 Option 3 Option 4

Option 3

Situation: A client is issuing 2 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 auditor's report.)

Other

Situation: 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

only be reported for the period being audited

PCAOB required that critical audit matters (CAMs):

Auditors should use separate __________ to describe emphasis-of-matter items and basis for modifications of the audit report.

Paragraphs

A basis for modification paragraph is ordinarily placed: Based on the auditor's judgment either before or after the opinion section. Within the "Auditor's Responsibility" section of the audit report. After the opinion section. Preceding the opinion section.

Preceding the opinion section.

"As discussed in Note XX to the FS, the company adopted SFAS XXX as of December 31, 20XX. Our opinion is not modified with respect to this standard."

Principles not consistently applied

When a client declines to disclose essential information in the financial statements or notes, the auditor of the financial statements should: Provide the information in the audit report, if practicable, and qualify the opinion because of a limitation on the scope of the audit. Provide the information in the audit report, if practicable, and qualify the opinion because of a departure from GAAP. Issue a disclaimer of opinion because the client has interfered with the auditor's function of assessing the adequacy of disclosure. Issue an unmodified opinion, but inform the reader by including the omitted information in the audit report.

Provide the information in the audit report, if practicable, and qualify the opinion because of a departure from GAAP.

When a client declines to disclose essential information in the financial statements or notes, the auditor of the financial statements should: Issue a disclaimer of opinion because the client has interfered with the auditor's function of assessing the adequacy of disclosure. Issue an unmodified opinion, but inform the reader by including the omitted information in the audit report. Provide the information in the audit report, if practicable, and qualify the opinion because of a limitation on the scope of the audit. Provide the information in the audit report, if practicable, and qualify the opinion because of a departure from GAAP.

Provide the information in the audit report, if practicable, and qualify the opinion because of a departure from GAAP.

London Company has material investments in stocks of subsidiary companies. Stocks of the subsidiary companies are not actively traded in the market, and the CPA firm's engagement does not extend to any subsidiary company. The CPA firm is able to determine that all investments are carried at original cost but has no real idea of market value. Although the difference between cost and market could be material, it could not have a pervasive effect on the overall financial statements.

Qualified

Report Type: London Company has material investments in stocks of subsidiary companies. Stocks ofthe subsidiary companies are not actively traded in the market, and the CPA firm'sengagement does not extend to any subsidiary company. The CPA firm is able todetermine that all investments are carried at original cost, but has no real idea of marketvalue. Although the difference between cost and market could be material, it could nothave a pervasive effect on the overall financial statements.

Qualified

Report Type: The auditors believe that the F.S. have been presented in conformity with GAAP in all respects, except that a loss contingency that should be disclosed through a note to the F.S. is not included. While they consider this a material omission, they do not believe it pervasively affects the F.S.

Qualified

Situation: 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

Situation: London Company has material investments in stocks of subsidiary companies. Stocks of the subsidiary companies are not actively traded in the market, and the CPA firm's engagement does not extend to any subsidiary company. The CPA firm is able to determine that all investments are carried at original cost, but has no real idea of market value. Although the difference between cost and market could be material, it could not have a pervasive effect on the overall financial statements.

Qualified

Situation: 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

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

Type of Report: The scope of the auditors' examination is restricted and material.

Qualified

What type or types of audit opinion are appropriate when financial statements are materially and pervasively misstated?

Qualified - No Adverse - Yes (When a misstatement is pervasive, an adverse opinion is appropriate.)

Qualified - No Unmodified with Emphasis of Matter - Yes (Substantial doubt about a client's ability to continue as a going concern results in either an unqualified report with explanatory language or a disclaimer of opinion. Accordingly answer (3) is correct since a qualified report is not appropriate.)

If financial statements contain a material departure from generally accepted accounting principles, the auditors usually should not issue an unqualified opinion. True False

TRUE

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 - Yes Unmodified with Emphasis of Matter - No (When an unjustified change in accounting principles occurs, either a qualified or adverse opinion is appropriate as this represents a departure from generally accepted accounting principles. Accordingly, answer (2) is correct since an adverse opinion, but not a disclaimer of opinion is appropriate.)

Situation: 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

Situation: A company has not followed generally accepted accounting principles in the recording of its leases.

Qualified or Adverse

Situation: 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

Situation: Draves Company owns substantial properties that have appreciated significantly in value since the date of purchase. The properties were appraised and are reported in the balance sheet at the appraised values (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.

Qualified or Adverse

Situation: In auditing the long-term investments account of a new client, an 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 the $2,000,000 estimate in that note.

Qualified or Adverse

Situation: 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.

Qualified or Adverse

Situation: 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

Situation: 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

What type of report(s) arises due to a scope limitation?

Qualified or Disclaimer

A company has not followed generally accepted accounting principles in the recording of its leases.

Qualified or adverse

Regulation S-X governs the form and content of financial statements filed with the SEC. True False

TRUE

In auditing the long-term investments account, an auditor is unable to obtain audited financial statements for an investee located in a foreign country. The auditor concludes that sufficient appropriate audit evidence regarding this investment cannot be obtained. (Type of Opinions/ Report Alteration)

Qualified or disclaimer/ Add a basis-for-modification paragraph—prior to opinion paragraph.

An entity discloses certain lease obligations in the notes to the financial statements. The auditor believes that the failure to capitalize these leases is a departure from generally accepted accounting principles and, although the possible effects on the financial statements of the misstatements are material, they could not be pervasive. (Type of Opinions/ Report Alteration)

Qualified/ Add a basis-for-modification paragraph—prior to opinion paragraph.

¨GAAP departures that are Material (but not pervasive) ¨Change in accounting principles where auditors disagree and they are material ¨Scope limitations that are not pervasive

Qualified/Modified

Use the accompanying solution sheet to reply to all of the situations below that relate to the audit of financial statements of nonpublic companies. Unless indicated otherwise, assume that material amounts are involved. Refer to Page 17-20

Refer to Page 17-20

1. "Certified Public Accountant's Report"

Replace with "Independent Auditor's Report"

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

Standard Unmodified

Situation: 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

Situation: An auditor was hired after year-end and was unable to observe the counting of the year-end inventory. However, she was able to apply other procedures and determined that ending inventory and related information is properly stated.

Standard Unmodified

Situation: In auditing the long-term investments account of a new client, an 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 the matter in detail.

Standard Unmodified

A client has changed the salvage values of a number of its fixed assets. The auditors believe that the salvage values are realistic. The appropriate report on the financial statements is:

Standard Unqualified

Client changed salvage values for number of fixed assets. Salvage values are realistic. What type of report is appropriate to issue?

Standard unmodified report; just a change in estimate

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

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

A client imposed scope limitation will generally result in a disclaimer of opinion. True False

TRUE

When evaluating the results of audit tests, materiality depends upon both the dollar amount and the nature of the item. True False

TRUE

Which of the following is correct concerning a public company audit report with a disclaimer of opinion? The paragraph describing the reason for the disclaimer will follow the opinion paragraph and will not include a title. The title of the Opinion section will be changed to Basis for Disclaimer of Opinion. It must include in a section on critical audit matters the circumstances that led to the disclaimer. It will ordinarily be issued in situations in which financial statements are materially and pervasively misstated.

The paragraph describing the reason for the disclaimer will follow the opinion paragraph and will not include a title.

Which of the following is not a difference between the audit report of a nonpublic and public company? The public company report has an additional paragraph referring to the client's fraud prevention procedures. The public company report is more likely to refer to a critical audit matter. The public company report includes the word "Registered" in the title. The public company report refers to standards of the PCAOB.

The public company report has an additional paragraph referring to the client's fraud prevention procedures.

Identify the deficiencies (including both incorrect statements and omissions) contained in the auditors' report on a nonpublic company as drafted below. You will receive credit for those you properly identify, and lose credit for those you identify which aren't actually deficiencies. Refer to Page 17-19

The report contains the following deficiencies: 1. Introductory paragraph • In sentence 1, the word "reviewed" should be "audited." • The sentence on the responsibility of management is omitted. 2. Scope Paragraph • Sentence 1 should state that the audit was performed in accordance with auditing standards generally accepted in the United States of America. • Sentence 2 should state that an audit provides "reasonable," not "absolute" assurance. 3. Opinion Paragraph • "Auditing standards" should be "accounting principles." • No mention of consistency should be made. 4. Other • The word "independent" should be included in the report's title. • The report should be dated as of the last day of field work, not the last day of the year being audited.

Which of the following would most likely be an appropriate addressee for an audit report? A third party who requested that a copy of the audit report be sent to her. The president of the corporation whose financial statements were examined. The chief financial officer. The shareholders of the corporation whose financial statements were examined.

The shareholders of the corporation whose financial statements were examined.

In which of the following circumstances would an auditor of financial statements be most likely to express an adverse opinion? The chief executive officer refuses the auditor access to minutes of board of directors' meetings. Information comes to the auditor's attention that raises substantial doubt about the entity's ability to continue in existence. The statements are not in conformity with FASB requirements regarding the capitalization of leases. Tests of controls show that the entity's internal control is so poor that it can not be relied upon.

The statements are not in conformity with FASB requirements regarding the capitalization of leases.

When reporting on comparative financial statements where the financial statements of the prior period have been examined by a predecessor auditor whose report is not presented, the successor auditor should indicate in the report: The type of opinion expressed by the predecessor auditor. Whether the predecessor auditor's review of the current year's financial statements revealed any matter that might have a material effect on the successor auditor's opinion. The identity of the predecessor auditor who examined the financial statements of the prior year. The reasons why the predecessor auditor's report is not presented

The type of opinion expressed by the predecessor auditor.

When reporting on comparative financial statements where the financial statements of the prior period have been examined by a predecessor auditor whose report is not presented, the successor auditor should indicate in the report: Whether the predecessor auditor's review of the current year's financial statements revealed any matter that might have a material effect on the successor auditor's opinion. The identity of the predecessor auditor who examined the financial statements of the prior year. The reasons why the predecessor auditor's report is not presented. The type of opinion expressed by the predecessor auditor.

The type of opinion expressed by the predecessor auditor.

Situation: Due to recurring operating losses and working capital deficiencies, you have 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 substantial doubt situation.

Unmodified with an Emphasis of Matter Paragraph or Disclaimer

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

An entity changes its depreciation method for production equipment from straight-line to a units-of-production method based on hours of utilization. The auditor concurs with the change, although it has a material effect on the comparability of the entity's financial statements. (Type of Opinions/ Report Alteration)

Unmodified/ Add an emphasis-of-matter paragraph—after opinion 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. However, the financial statement disclosures concerning these matters are adequate. The auditor has decided not to issue a disclaimer of opinion. (Type of Opinions/ Report Alteration)

Unmodified/ Add an emphasis-of-matter paragraph—after opinion paragraph.

A group auditor decides to take responsibility for the work of a component CPA who audited a wholly owned subsidiary of the entity and issued an unmodified opinion. The total assets and revenues of the subsidiary represent 17 percent and 18 percent, respectively, of the total assets and revenues of the entity being audited. (Type of Opinions/ Report Alteration)

Unmodified/Issue standard report without alteration.

Bowles Company is engaged in a 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

Unmodified—with an emphasis-of-matter paragraph.

Unmodified—with an emphasis-of-matter paragraph.selected answer correct

If auditors encounter a scope limitation but perform alternative procedures and obtain sufficient appropriate audit evidence, auditors should issue a(n) __________ report.

Unqualified

¨Immaterial GAAP departures are passed on...issue unqualified opinion ¨Change in estimates (like useful lives) ¨Normal business risks...can still issue unqualified opinion ¨Changes in classification—change where expenses were coded between years

Unqualified/Unmodified (no modifications)

When financial statements of a prior period are presented on a comparative basis with financial statements of the current period, the continuing auditor is responsible for: Expressing dual dated opinions. Updating the report on the previous financial statements regardless of the opinion previously issued. Updating the report on the previous financial statements only if there has not been a change in the opinion. Updating the report on the previous financial statements only if the previous report was qualified and the reasons for the qualification no longer exist.

Updating the report on the previous financial statements regardless of the opinion previously issued.

Which of the following is least likely to result in an emphasis-of-matter paragraph being added to an unmodified auditor's report on the financial statements of a nonpublic client that sells jewelry through a retail store? Use of an unacceptable method to value inventory with results that differ materially from GAAP. A change from FIFO to specific identification accounting for inventory. A decision by the auditor to emphasize that the client is a part of a larger organization. A question as to whether the client will be able to remain a going concern.

Use of an unacceptable method to value inventory with results that differ materially from GAAP.

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 (When the auditors take exception to the application of accounting principles in the client's financial statements, they will issue either a qualified or adverse opinion, depending on whether the misstatement is considered pervasive.)

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

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

A material departure from generally accepted accounting principles will result in auditor consideration of: Multiple Choice Whether to issue an adverse opinion rather than a disclaimer of opinion. Whether to issue a disclaimer of opinion rather than a qualified opinion. Whether to issue an adverse opinion rather than a qualified opinion.

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

A change from deferring and amortizing preproduction costs to recording such costs as an expense when incurred because future benefits of the costs have become doubtful. The new accounting method was adopted in recognition of the change in estimated future benefits. (Yes or No)

Yes

A change from direct costing to full absorption costing for inventory valuation. Should the audit report include an emphasis-of-matter paragraph on consistency?

Yes

A change from the FIFO method of inventory pricing to the LIFO method of inventory pricing. (Yes or No)

Yes

Emphasis of matter paragraph needed? (1) A change from the completed-contract method to the percentage-of-completion method of accounting for long-term construction contracts. (2) A change in the estimated service lives of previously recorded plant assets based on newly acquired information. (3) Correction of a mathematical error in inventory pricing made in a prior period. (4) A change from direct costing to full absorption costing for inventory valuation. (5) A change from deferring and amortizing preproduction costs to recording such costs as an expense when incurred because future benefits of the costs have become doubtful. The new accounting method was adopted in recognition of the change in estimated future benefits. (6) A change to including the employer's share of FICA taxes as "Retirement benefits" on the income statement. This information was previously included with "Other taxes." (7) A change from the FIFO method of inventory pricing to the LIFO method of inventory pricing.

Yes No Yes Yes Yes No Yes

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 Unmodified Yes Yes Yes No No Yes No No

Yes No

Unmodified? Additional paragraph? A change to an accounting principle that the auditor considers desirable.

Yes, yes

Unmodified? Additional paragraph? The emphasis-of-matter.

Yes, yes

A change to an accounting principle that the auditor considers desirable.

Yes/ Yes

Emphasis of a matter

Yes/ Yes

Reliance upon component auditors

Yes/No

Your audit of the Abbox Co. reveals that the firm's poor financial condition creates substantial doubt about its ability to continue as a going concern. Assuming that the financial statements have otherwise been prepared in accordance with generally accepted accounting principles and do include proper presentation of the matter, what disclosure should you make of the company's precarious financial position? You should issue an unmodified opinion, but use an emphasis-of-matter paragraph to direct the reader's attention to the poor financial condition of the company as described in the financial statements and the notes. You should issue an adverse opinion on the financial statements. You need not insist on any particular disclosure, since the company's poor financial condition is clearly indicated by the financial statements themselves. You should provide adequate disclosure and appropriately qualify your opinion because of the uncertainty.

You should issue an unmodified opinion, but use an emphasis-of-matter paragraph to direct the reader's attention to the poor financial condition of the company as described in the financial statements and the notes.

Your audit of the Abbox Co. reveals that the firm's poor financial condition creates substantial doubt about its ability to continue as a going concern. Assuming that the financial statements have otherwise been prepared in accordance with generally accepted accounting principles and do include proper presentation of the matter, what disclosure should you make of the company's precarious financial position? You should issue an unmodified opinion, but use an emphasis-of-matter paragraph to direct the reader's attention to the poor financial condition of the company as described in the financial statements and the notes. You should issue an adverse opinion on the financial statements. You need not insist on any particular disclosure, since the company's poor financial condition is clearly indicated by the financial statements themselves. You should provide adequate disclosure and appropriately qualify your opinion because of the uncertainty.

scope

a qualified opinion is issued when auditors are unable to obtain suff appropriate audit evidence on which to base the opinion bc of an___ limitation

When an adverse opinion is expressed, the opinion paragraph should include a direct reference to: a note to the financial statements which discusses the basis for the opinion. the paragraph that describes management's responsibilities. the consistency or lack of consistency in the application of generally accepted accounting principles. a separate paragraph that discusses the basis for the opinion expressed.

a separate paragraph that discusses the basis for the opinion expressed.

A note to the financial statements of the First Security Bank indicates that the company self insures itself for the first $500,000 of liability to employees, with liability insurance for the remainder. Based upon this, one would expect the auditors' report to express: an adverse opinion. a disclaimer of opinion. a standard unmodified opinion. a qualified opinion.

a standard unmodified opinion.

Which of the following is not explicitly included in an audit report for a nonpublic company? a. A statement that the auditor believes that the audit provides a reasonable basis for expressing negative assurance. b. A statement that the auditor's responsibility is to express an opinion on the financial statements. c. A statement that the financial statements are the responsibility of management. d. A title with the word "independent."

a. A statement that the auditor believes that the audit provides a reasonable basis for expressing negative assurance.

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

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: • Unless stated otherwise, assume the matter involved is material. • If the problem does not state that a misstatement (or possible misstatement) is pervasive, assume that it may or may not be pervasive (thus, the appropriate reply may include two possible reports). • Do not read more into the circumstance than what is presented. Do not consider an auditor discretionary circumstance for modification of the audit report unless the situation explicitly suggests that the auditors wish to emphasize a particular matter. Report Types may be used once, more than once, or not at all. 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. b. 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 c. 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. d. 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 e. 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.

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 b. 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 c. 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 d. 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 e. 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

The auditors include an emphasis-of-matter paragraph in an audit report with an unmodified opinion in order to emphasize that the entity being reported upon is a subsidiary of another business enterprise. The inclusion of this paragraph: a. Is appropriate and would not negate the unmodified opinion. b. Is considered a qualification of the opinion. c. Is a violation of generally accepted reporting standards if this information is disclosed in notes to the financial statements. d. Necessitates a revision of the opinion paragraph to include the phrase "with the foregoing explanation."

a. Is appropriate and would not negate the unmodified opinion.

William & Plaud are principle auditors for the Lowell Corporation. One of the subsidiaries of Lowell Corporation, Wilson Manufacturing Co., is audited by Lyle & Adams. a. If William & Plaud make reference in their report to reliance on the report of other auditors are they qualifying their opinion? Explain. b. Regardless of whether William & Plaud make reference to reliance on the report of the other auditors, they should perform certain procedures with respect to Lyle and Adams' audit. What are these procedures?

a. No. The auditors are indicating a division of responsibility between them and the other auditors. b. The auditors should: • Make inquiries concerning the other auditors' professional reputation. • Obtain a letter from the other auditors stating that they are aware of the use of their report and that they are independent with respect to the client.

a. Not to be construed as a qualification, but rather as a division of responsibility between the two CPA firms.

A client has changed the salvage values of a number of its fixed assets. The auditors believe that the revised salvage values are realistic. The appropriate report on the financial statements is: a. Standard unmodified. b. Unmodified with explanatory language as to consistency. c. Qualified for consistency. d. Disclaimer.

a. Standard unmodified.

Upon completing an audit, the auditors should issue an opinion on the client's financial statements. a. List the conditions that permit the issuance of an unqualified opinion on the financial statements. b. Describe three situations in which the auditors may modify their standard report and still issue an unqualified opinion.

a. The conditions that permit issuance of an unqualified opinion include: 1. The financial statements are presented in conformity with generally accepted accounting principles, including adequate disclosure. 2. The audit was performed in accordance with generally accepted auditing standards and there were no significant scope limitations preventing the auditors from gathering the evidence necessary to support their opinion. b. Modifications of the auditors' report that do not result in qualification include (only three required): • Reliance upon other auditors (shared responsibility audits). • Emphasis of a matter. • Departure from an officially recognized accounting principle because application would result in materially misleading financial statements. • A question about a company's ability to remain a going concern. • GAAP not consistently applied.

A qualified opinion states that the financial statements are presented fairly in conformity with generally accepted accounting principles "EXCEPT FOR" the effects of some matter.

modified opinions-qualified

In which of the following circumstances would an auditor of financial statements be most likely to express an adverse opinion? a. The statements are not in conformity with FASB requirements regarding the capitalization of leases. b. Information comes to the auditor's attention that raises substantial doubt about the entity's ability to continue in existence. c. The chief executive officer refuses the auditor access to minutes of board of directors' meetings. d. Tests of controls show that the entity's internal control is so poor that it can not be relied upon.

a. The statements are not in conformity with FASB requirements regarding the capitalization of leases.

When financial statements contain a material departure from generally accepted accounting principles, the auditors qualify their opinion, or they issue a(n) __________ opinion depending on the materiality of the departure.

adverse

- newly adopted principle is generally accepted -the method of accounting for the effect of the change is in conformity w/ GAAP -the disclosures related to the change are adequate -management has justified that the new acc principle is preferable

auditors evaluate changes in accounting principles to determine if:

adverse

auditors issue an___ opinion when the fin stat are not fairly presented in conformity with GAAP

Which of the following will result in emphasis-of-matter as to consistency in the auditor's report, regardless of whether the item is fully disclosed in the financial statements? a. A change in accounting estimate. b. A change from an unacceptable accounting principle to a generally accepted one. c. Correction of an error not involving a change in accounting principle. d. A change in classification.

b. A change from an unacceptable accounting principle to a generally accepted one.

When an auditor of financial statements has substantial doubt about an entity's ability to continue as a going concern, the auditor most likely would express a qualified opinion if: a. The effects of the adverse financial conditions are likely to be negative. b. Information about the entity's ability to continue as a going concern is not disclosed in the financial statements. c. Management has no plans to reduce or delay future expenditures. d. Negative trends and recurring operating losses appear to be irreversible.

b. Information about the entity's ability to continue as a going concern is not disclosed in the financial statements.

When an auditor does not confirm material accounts receivable, but is satisfied by the application of alternative auditing procedures, she normally should: a. Issue an unmodified opinion, but disclose elsewhere in the report this departure from a customary procedure. b. Issue an unmodified opinion with no reference to this omission. c. Issue a qualified opinion or a disclaimer, depending on the materiality of the receivables. d. Issue an adverse opinion.

b. Issue an unmodified opinion with no reference to this omission.

Which of the following is not correct relating to an audit report for a public company? a. It includes an additional paragraph indicating that the auditors have also issued a report on the client's internal control over financial reporting. b. It includes the term "PCAOB Compliant" in the title. c. It must include the city and state in which it was issued. d. It refers to standards of the Public Company Accounting Oversight Board.

b. It includes the term "PCAOB Compliant" in the title.

Which of the following is least likely to result in a qualification of the auditors' opinion due to a scope limitation? a. Scope limitations imposed by the client. b. Reliance placed upon the report of component auditors. c. Inability to obtain sufficient appropriate audit evidence. d. Inadequate accounting records.

b. Reliance placed upon the report of component auditors.

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 Unmodified with Emphasis-of-Matter a. Yes Yes b. Yes No c. No Yes d. No No

c. No Yes

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

The unmodified standard audit report of a nonpublic company does not explicitly state that: a. The financial statements are the responsibility of the company's management. b. The audit was conducted in accordance with accounting principles generally accepted in the United States of America. c. The auditors believe that the audit provides a reasonable basis for their opinion. d. An audit includes assessing the accounting principles used.

b. The audit was conducted in accordance with accounting principles generally accepted in the United States of America.

If audited financial statements include a balance sheet and an income statement, but do not include a statement of cash flows: a. The auditors may still issue an unmodified opinion. b. The auditors should issue a qualified report for the departure from generally accepted accounting principles. c. The auditors should issue a qualified report indicating a scope limitation in that no statement of cash flows is presented. d. The auditors should disclaim an opinion on the overall financial statements.

b. The auditors should issue a qualified report for the departure from generally accepted accounting principles.

Jones, CPA, accepts a new client late in Year 5 and therefore had no opportunity to observe the physical inventory taken at December 31, Year 4. Jones found it impossible to obtain evidence by other auditing procedures as to the beginning inventories for Year 5. Jones observed the physical inventory at December 31, Year 5 and completed the audit satisfactorily. The report to be issued should: a. be a disclaimer of opinion. b. be unmodified as to the balance sheet and with a disclaimer of opinion as to the income statement and the statement of cash flows. c. be unmodified. d. be qualified as to all of the statements.

b. be unmodified as to the balance sheet and with a disclaimer of opinion as to the income statement and the statement of cash flows.

If the auditors indicate in the report that the opinion is based, in part, on the report of component auditors who were responsible for the audit of part of the total financial statement data, the auditors are: a. in effect qualifying the opinion. b. properly indicating a division of responsibility, and the report should further indicate in an appropriate quantitative form the proportionate responsibility being assumed by each set of auditors. c. taking complete responsible for the work of the other auditors. d. abrogating responsibility to those users who rely on the CPA firm's reputation as a basis for relying on the reported financial statements.

b. properly indicating a division of responsibility, and the report should further indicate in an appropriate quantitative form the proportionate responsibility being assumed by each set of auditors.

Jones, CPA, accepts a new client late in Year 5 and therefore had no opportunity to observe the physical inventory taken at December 31, Year 4. Jones found it impossible to obtain evidence by other auditing procedures as to the beginning inventories for Year 5. Jones observed the physical inventory at December 31, Year 5 and completed the audit satisfactorily. The report to be issued should: be unmodified. be unmodified as to the balance sheet and with a disclaimer of opinion as to the income statement and the statement of cash flows. be qualified as to all of the statements. be a disclaimer of opinion.

be unmodified as to the balance sheet and with a disclaimer of opinion as to the income statement and the statement of cash flows.

Jones, CPA, accepts a new client late in Year 5 and therefore had no opportunity to observe the physical inventory taken at December 31, Year 4. Jones found it impossible to obtain evidence by other auditing procedures as to the beginning inventories for Year 5. Jones observed the physical inventory at December 31, Year 5 and completed the audit satisfactorily. The report to be issued should: be unmodified. be unmodified as to the balance sheet and with a disclaimer of opinion as to the income statement and the statement of cash flows. be qualified as to all of the statements. be a disclaimer of opinion.

be unmodified as to the balance sheet and with a disclaimer of opinion as to the income statement and the statement of cash flows.

c. A decision not to confirm accounts receivable.

When an adverse opinion is expressed, the opinion paragraph should include a direct reference to: a. A note to the financial statements which discusses the basis for the opinion. b. The Auditor's Responsibility section of the audit report which discusses the basis for the opinion rendered. c. A separate paragraph (section) which discusses the basis for the opinion rendered. d. the consistency in the application of generally accepted accounting principles.

c. A separate paragraph (section) which discusses the basis for the opinion rendered.

c. Generally accepted accounting principles (United States).

After considering an entity's negative trends and financial difficulties, an auditor has substantial doubt about the entity's ability to continue as a going concern. The auditor's considerations relating to management's plans for dealing with the adverse effects of these conditions most likely would include management's plans to: a. Increase current dividend distributions. b. Reduce existing lines of credit. c. Increase ownership equity. d. Purchase assets formerly leased.

c. Increase ownership equity.

When financial statements are affected by a material departure from generally accepted accounting principles, the auditors should: a. Issue an unmodified opinion with a basis for modification paragraph. b. Withdraw from the engagement. c. Issue an "except for" qualification or an adverse opinion. d. Issue an "except for" qualification or a disclaimer of opinion.

c. Issue an "except for" qualification or an adverse opinion.

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: Y/N Unmodified w/ EOM: Y/N a. Yes & Yes b. Yes & No c. No & Yes d. No & No

c. No & Yes

c. No Yes

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

1) Material departure from GAAP in the client's financial statements 2) Material scope limitation 3) Conditions, although not departures from GAAP, about which the readers of the financial statements should be informed

modification of the auditors standard report

Which of the following is not a difference between the audit report of a nonpublic and public company? a. the public company report includes the word "Registered" in the title. b. The public company report refers to standards of the PCAOB. c. The public company report has an additional paragraph referring to the client's fraud prevention procedures. d. The public company report is shorter.

c. The public company report has an additional paragraph referring to the client's fraud prevention procedures.

In which of the following circumstances will it be most likely that an adverse opinion is considered appropriate? a. the auditor is not independent with respect to the enterprise being audited. b. The statements are not in conformity with generally accepted accounting principles due to a departure from GAAP with an immaterial effect on the financial statements. c. The statements are not in conformity with generally accepted accounting principles regarding pension plans. d. A client-imposed scope limitation prevents the auditor from obtaining sufficient appropriate audit evidence.

c. The statements are not in conformity with generally accepted accounting principles regarding pension plans.

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

A disclaimer of opinion states that due to a significant scope limitation, the auditors were unable to form an opinion or did not form an opinion on the financial statements.

modified opinion-disclaimer

An adverse opinion states that the financial statements are not presented fairly in conformity with generally accepted accounting principles.

modified opinions- adverse

A client company has changed its accounting practices during the year, materially affecting its financial statements so as to make them seriously misleading and not in conformity with generally accepted accounting principles. The CPAs examining these financial statements should: a. modify the opinion with respect to consistency and, in an emphasis-of-matter paragraph, explain the changes and their effects on the net income of the period. b. modify the opinion with respect to consistency, referring to explanatory notes of the financial statements to fulfill disclosure requirements. c. disclaim an opinion and give reasons. d. render an adverse opinion and give reasons.

d. render an adverse opinion and give reasons.

Upon the advice of its auditors, Smith Company changed the method of computing depreciation from the straight-line method to an accelerated method with a material effect upon the financial statements. The auditors' report: a. should be a standard unmodified report. b. must be qualified for the accounting change. c. should contain modification of the opinion paragraph. d. should include an additional emphasis-of-matter paragraph highlighting the accounting change.

d. should include an additional emphasis-of-matter paragraph highlighting the accounting change.

If a scope limitation is so severe that a qualified opinion is inappropriate, the auditors should issue a(n) __________.

disclaimer of opinion

As discussed in Note 1 to the Consolidated Financial Statements, the Company changed its method for testing goodwill for impairment. They changed the method as a result of the adoption of the amendments to the FASB Accounting Standards Codification resulting from Accounting Standards Update No. 2017-04, "Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment." Our opinion is not modified with respect to this matter.

emphasis of matter paragraph- lack of consistency

auditors opinion is not modified w/ respect to the matter NOTE: Ordinarily an unmodified opinion with an emphasis-of-matter paragraph is issued. Alternatively, a disclaimer of opinion may be issued.

emphasis of matter paragraph- substantial doubt as to going concern status

GAAP assumes that a company is a going concern. - assumption that the company will continue to operate for a reasonable period of time how long is reasonable period of time? year from the days of issuance of the FS

emphasis of matter- going concern

the audit documentation should be in sufficient detail to

enable an experienced auditor, having no previous connection with the engagement, to understand the determinations made to comply with the provisions of this standard.

basis... opinion

for a nonpublic company a qualified departure from GAAP requires an___ for modification paragraph and changes to the ___ paragraph.

standard unmodified report

group auditors that make no ref to the component auditors should issue an:

component

group financial statements are those of a company that consists of more than one ___

Upon the advice of its auditors, Smith Company changed the method of computing depreciation from the straight-line method to an accelerated method with a material effect upon the financial statements. The auditors' report: must be qualified for the accounting change. should include an additional paragraph highlighting the accounting change. should contain modification of the opinion paragraph. should be a standard unmodified report.

should include an additional paragraph highlighting the accounting change.

Critical audit matters are not a

substitute for required explanatory language

-the fin statements are prepared -all audit doc has been reviewed

sufficient appropriate audit evidence is obtained when:

material and pervasive

the decision on whether a scope limitation results in a qualified or disclaimer of opinion on whether misstatements or possibly misstatements are both ___ and ___

independent

the title for a standard unmodified report for a nonpublic company must include the word ___ to describe the auditors relationship to the client

period

to evaluate consistent application of GAAP when reporting on only the current period, auditors should consider the current period under audit and the preceding:

unmodified opinion- w/ an emphasis of matter paragraph to emphasize a matter that is appropriately presented in the financial statements. ex: going concern matter or a change in accounting principle

types of reports with unmodified opinions

If the auditors have examined the prior year's financial statements presented for comparative purposes, they should __________ their opinion for any new information.

update

-adverse opinion -qualified opinion

when auditors determine a change in accounting principle is not appropriate, the auditors can issue an:

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