AUD 1 M7- emphasis of matter, other-matter, and explain paragraphs

When there has been a change in accounting principle that materially affects the comparability of the nonusers comparative FS presented and the auditor concurs with the change, the auditor should: 1.)concur explicitly with the change? 2.) issue an "except for" qualified opinion? 3.) refer to the change in an emphasis of matter paragraph?

1.) No 2.) No 3.) Yes

When there is a significant change in accounting principle, an auditor's report should refer to the lack of consistency in:

An emphasis of matter paragraph following the opinion paragraph

For a particular entity's financial statements to be presented fairly in conformity with the applicable financial reporting framework, 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.

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

An auditor includes a separate paragraph in an otherwise unmodified report to emphasize that the entity being reported on had significant transactions with related parties. The inclusion of this separate paragraph:

Is appropriate and would not negate the unmodified option

When there has been a change in accounting principles, but the effect of the change on the comparability of the financial statements is not material, the auditor should:

Not refer to consistency in the auditor's report

When an entity changes its method of accounting for income taxes, which has a material effect on comparability, the auditor should refer to the change in an emphasis-of-matter paragraph added to the auditor's report. This paragraph should identify the nature of the change and:

Refer to the FS note that discusses the change in detail

Which of the following is true? A. When an auditor includes a paragraph after the opinion paragraph emphasizing a significant related party transaction, the opinion would be considered a qualified opinion. B. When a material accounting change has been properly accounted for and disclosed, the auditor may not issue an unmodified opinion. C. If an auditor believes there is substantial doubt about an entity's ability to continue as a going concern, and management has properly disclosed the situation, the auditor may not issue an unmodified opinion. D. The auditor may issue an unmodified opinion when a material departure from GAAP exists.

The auditor may issue an unmodified opinion when a material departure from GAAP exists; Although this situation is unusual, if a departure from GAAP is justified, the auditor may issue an unmodified opinion with an emphasis-of-matter paragraph.

In which of the following circumstances would an auditor most likely add an emphasis-of- matter paragraph to the report while not affecting the auditor's unmodified opinion? A. The auditor is asked to report on the balance sheet, but not on the other basic financial statements. B. There is substantial doubt about the entity's ability to continue as a going concern. C. Management's estimates of the effects of future events are unreasonable. D. Certain transactions cannot be tested because of management's records retention policy.

There is substantial doubt about the entity's ability to continue as a going concern

Management of Hill Company has decided not to account for a material transaction in accordance with the provisions of GAAP. In setting forth its reasons in a note to the financial statements, management has clearly demonstrated that due to unusual circumstances the financial statements presented in accordance with the GAAP would be misleading. The auditor's report should include an emphasis-of-matter paragraph and contain a(an):

Unmodified opinion; In unusual circumstances, where the literal application of accounting standards would make the financial statements misleading (e.g., new legislation or new business practices), the proper accounting treatment is that which will more fairly present the financial statements. In such a case, the auditor should express an unmodified opinion on the financial statements and include an emphasis-of-matter paragraph.

When would an auditor issue a report that omits any reference to consistency?

a change in the useful life used to calculate the provision for depreciation expense; A change in accounting estimate (such as a change in the useful life of a depreciable asset) is accounted for prospectively and does not affect the comparability of FS b/w periods. Bc the auditor's unmodified opinion implies that consistency exists, no modification to report is necessary

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

an emphasis of matter paragraph following the opinion paragraph

An auditor most likely would express an unmodified opinion and would not add emphasis of matter or other matter paragraphs to report if the auditor:

believes that there is a probable likelihood of material loss resulting from an uncertainty that is sufficiently supported and disclosed

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:

disclosed in the notes to the FS of the current year

In the first audit of a new client, an auditor was able to extend auditing procedures to gather sufficient evidence about consistency. Under these circumstances, the auditor should:

not refer to consistency in the auditors report

When there has been a change in accounting principles, but the effect of the change on the comparability of the financial statements is not material, the auditor should:

not refer to the change in the auditors report; If the change in accounting principles has an immaterial effect on the comparability of financial statements, no revision to the audit report is necessary.

It is not appropriate to refer a reader of an auditor's report to a financial statement footnote for details concerning:

the results of confirmation of receivables

The following paragraph was included in an auditor's report to indicate a lack of consistency: "As discussed in note T to the financial statements, the company changed its method of computing depreciation in Year 2." How should the auditor report on this matter if the auditor concurred with the change?

type of opinion: unmodified location of paragraph: after opinion paragraph

An entity changed from the straight-line method to the declining balance method of depreciation for all newly acquired assets. This change has no material effect on the current year's financial statements, but is reasonably certain to have a substantial effect in later years. If the change is disclosed in the notes to the financial statements, the auditor should issue a report with a(an):

unmodified opinion

Management of a nonissuer believes and the auditor is satisfied that a material loss probably will occur when pending litigation is resolved. Management is unable to make a reasonable estimate of the amount or range of the potential loss, but fully discloses the situation in the notes to the financial statements. If management does not make an accrual in the financial statements, the auditor should express a (an):

unmodified opinion; If a contingent liability is probable, but not estimable, and it is disclosed in the footnotes, the auditor should issue an unmodified opinion.

Grant Company's financial statements adequately disclose uncertainties that concern future events, the outcome of which are not susceptible of reasonable estimation. The auditor's report should include a (an):

unmodified opinion; The auditor should issue an "unmodified opinion" when management adequately discloses future events, the outcome of which are not susceptible of reasonable estimation. Under U.S. auditing standards an emphasis-of-matter paragraph may be added by the auditor if the matter is of such importance that it is fundamental to the users' understanding of the financial statements. International Standards on Auditing recommend the addition of a paragraph describing the significant uncertainty.

Management of Edgington Industries plans to disclose an uncertainty as follows: The Company is a defendant in a lawsuit alleging infringement of certain patent rights and claiming damages. Discovery proceedings are in progress. The ultimate outcome of the litigation cannot presently be determined. Accordingly, no provision for any liability that may result upon adjudication has been made in the accompanying financial statements. The auditor is satisfied that sufficient audit evidence supports management's assertions about the nature and disclosure of the uncertainty. What type of opinion should the auditor express under these circumstances under U.S. auditing standards?

unmodified without an emphasis-of-matter paragraph; the note presented describes an uncertainty that is properly disclosed. An emphasis-of-matter paragraph is not required in the unmodified opinion under U.S. auditing standards.