Audit Chapter 12
Company A hired Samson & Delilah, CPAs, to audit the financial statements of Company B and deliver the report to Megabank. Who is the client? Multiple Choice Company B. Megabank. Company A. Correct Samson & Delilah.
Company A. Correct
Going Concern Opinions Read the case and answer the questions that follow. Oftentimes, especially in challenging economic times, companies may not have positive financial results. The professional standards require that auditors evaluate whether there is substantial doubt about the company's ability to continue as a going concern for a reasonable period of time--a year from the balance sheet date. CONCEPT REVIEW: Tremendous judgment is involved in this phase of the audit. It should be noted that while auditors are not required to perform procedures to test the going concern assumption, they must evaluate the assumption in relation to the results of the audit procedures performed relative to the other components of the audit.
1. An emphasis-of-matter paragraph always follows the ______ paragraph. *opinion* 2. Auditors are _____ required to perform procedures specifically designed to test the going concern assumption. *not* 3. When items are identified that affect the going concern assumption, auditors must gather ________. *evidence* 4. In addition to an emphasis-of-matter paragraph, auditors could issue a(n) _________ in a going concern situation. *disclaimer* 5. A going concern evaluation should include evaluation of ________ from the balance sheet date. *one year*
Types of Audit Opinions Read the overview below and complete the activities that follow. After completing a financial statement audit, the auditor needs to assess the situation to determine the proper type of report to issue. Expressing an independent opinion on the fairness of financial statements is an attestation service most frequently provided by auditors. The opinion is expressed in the auditors' report. CONCEPT REVIEW: Audit reports can be unmodified or modified. A report with an unmodified opinion may be a "standard report" or can include an emphasis-of-matter paragraph. A modified report can have an extra explanatory paragraph in connection with a qualified opinion, adverse opinion, or disclaimer of opinion.
1. Auditors _____ an opinion when they are unable to form an opinion. *disclaim* 2. Limitations on the scope of an audit may create a situation in which the auditors are unable to obtain sufficient ________. *evidence* 3. Qualified opinions are issued when the financial statements are ________ misstated. *materially* 4. When there is significant doubt as to the ability to continue as a going concern, a(n) _________ paragraph may be added. *emphasis-of-matter* 5. A(n) _____ opinion is appropriate if a material misstatement is considered pervasive. *adverse*
Emphasis-of-Matter Paragraph Read the overview below and complete the activities that follow. When issuing financial statements and their related opinion, the auditor needs to assess the situation to determine the proper type of report to issue. Auditors express an unmodified opinion when they are able to obtain sufficient and appropriate audit evidence that the financial statements as a whole are free of material misstatement. Under certain circumstances, however, auditors may add an emphasis-of-matter paragraph that refers to a matter appropriately presented. CONCEPT REVIEW: The emphasis-of-matter paragraph follows the opinion paragraph and states that the auditor's opinion is not modified, but that the matter is to be emphasized.
1. Auditors may add an emphasis-of-matter paragraph that refers to a matter that is _________ presented or disclosed. *appropriately* 2. A going concern is to be evaluated for a period not to exceed _________ beyond the date of the financial statements. *one year* 3. If substantial doubt about a going concern exists, an ______ paragraph is the most common resolution. *emphasis-of-matter* 4. An emphasis-of-matter paragraph always _______ the opinion paragraph. *follows* 5. Changes in accounting estimates ______ result in an explanatory paragraph. *do not*
Various Reporting Situations. Assume that the auditors encountered the following separate situations when deciding on the report to issue for the current-year financial statements. (If the kind of opinion depends on the reason for the scope limitation (if applicable), the degree of materiality, and/or the pervasiveness of the matter discussed, then choose an answer choice that encompasses the two possible opinion types.) The auditors decided that sufficient appropriate evidence could not be obtained to complete the audit of significant investments the entity held in a foreign entity. The entity failed to capitalize lease assets and obligations but explained them fully in the notes to the financial statements. These lease obligations meet the criteria for capitalization under ASC 840. The entity is defending a lawsuit on product liability claims. (Customers allege that power saw safety guards were improperly installed.) All facts about the lawsuit are disclosed in the notes to the financial statements, but the auditors believe the entity should record a loss based on a probable settlement mentioned by the entity's attorneys. The entity hired the auditors after taking inventory on December 31. The accounting records and other evidence are not reliable enough to enable the auditors to have sufficient evidence about the proper inventory amount. The FASB requires the energy company to present supplementary oil and gas reserve information outside the basic financial statements. The auditors find that this information, which is not required as a part of the basic financial statements, has been omitted. The auditors are group auditors of the parent company, but they reviewed the component auditors' work and reputation and decide not to take responsibility for the work of the component auditors on three subsidiary companies included in the consolidated financial statements. The component auditors' work amounts to 32 percent of the consolidated assets and 39 percent of the consolidated revenues. The entity changed its depreciation method from units of production to straight line, and its auditors believe the straight-line method is the more appropriate method in the circumstances. The change, fully explained in the notes to the financial statements, has a material effect on the year-to-year comparability of the comparative financial statements. Because the entity has experienced significant operating losses and has had to obtain waivers of debt payment requirements from its lenders, the auditors decide that there is substantial doubt that the entity can continue as a going concern. The entity has fully described all problems in a note in the financial statements and the auditors believe that, while material, the uncertainty is not serious enough to warrant a disclaimer of opinion. Required: What kind of opinion should the auditors express in each separate case?
1. Qualified or disclaimer of opinion 2. Qualified or adverse 3. Qualified or adverse 4. Qualified or disclaimer of opinion 5. Unmodified 6. Unmodified 7. Unmodified 8. Unmodified
Auditors found that the entity has not capitalized a material amount of leases in the financial statements. When considering the materiality of this departure from GAAP, the auditors would choose between which reporting options? Multiple Choice Unmodified opinion or disclaimer of opinion. Unmodified opinion or qualified opinion. Unmodified opinion with an emphasis-of-matter paragraph or an adverse opinion. Qualified opinion or adverse opinion.
Qualified opinion or adverse opinion.
Types of Audit Opinions Read the overview below and complete the activities that follow. After completing a financial statement audit, the auditor needs to assess the situation to determine the proper type of report to issue. Expressing an independent opinion on the fairness of financial statements is an attestation service most frequently provided by auditors. The opinion is expressed in the auditors' report. CONCEPT REVIEW: Audit reports can be unmodified or modified. A report with an unmodified opinion may be a "standard report" or can include an emphasis-of-matter paragraph. A modified report can have an extra explanatory paragraph in connection with a qualified opinion, adverse opinion, or disclaimer of opinion.
*Unmodified Opinion* -- Auditors have obtained sufficiently appropriate evidence to conclude that the financial statements are not materially misstated *Unqualified Opinion with an Emphasis-of-Matter Paragraph* -- Auditors have doubt about a company's ability to continue as a going concern *Adverse Opinion* -- The client has elected to not follow GAAP *Adverse Opinion* -- A material misstatement is considered pervasive *Disclaimer of Opinion* -- 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
Which of the following is not included in the standard (unmodified) report on the financial statements? Multiple Choice An opinion that the financial statements present financial position in accordance with GAAP. An emphasis-of-matter paragraph commenting on the effect of economic conditions on the entity. Correct An identification of the financial statements that were audited. A general description of an audit.
An emphasis-of-matter paragraph commenting on the effect of economic conditions on the entity. Correct
When auditors wish to issue an unmodified opinion but highlight that the entity changed its method of accounting for software development costs, they would most appropriately identify the change in accounting method in which of the following? Multiple Choice An other-matter paragraph. An emphasis-of-matter paragraph. Correct The opinion paragraph. The introductory paragraph.
An emphasis-of-matter paragraph. Correct
Which of the following statements is not true with respect to the audit examinations and reports for public and nonpublic entities? Multiple Choice Management is responsible for the fairness of the financial statements for both public entities and nonpublic entities. The reports for both public and nonpublic entities express an opinion on the entity's financial statements. Auditors are required to express an opinion on internal control in the audit of nonpublic entities but not in the audit of public entities. Correct Audit examinations for nonpublic entities are based on user demand but based on legislative requirements for public entities.
Auditors are required to express an opinion on internal control in the audit of nonpublic entities but not in the audit of public entities. Correct
Which of these situations would require auditors to append an emphasis-of-matter paragraph about consistency to an otherwise unmodified opinion? Multiple Choice Entity corrected a prior mistake in accounting for interest capitalization. Entity changed its estimated allowance for uncollectible accounts receivable. Entity changed its inventory costing method from FIFO to LIFO. Correct Entity sold one of its subsidiaries and consolidated six subsidiaries this year compared to seven last year.
Entity changed its inventory costing method from FIFO to LIFO. Correct
Emphasis-of-Matter Paragraph Read the overview below and complete the activities that follow. When issuing financial statements and their related opinion, the auditor needs to assess the situation to determine the proper type of report to issue. Auditors express an unmodified opinion when they are able to obtain sufficient and appropriate audit evidence that the financial statements as a whole are free of material misstatement. Under certain circumstances, however, auditors may add an emphasis-of-matter paragraph that refers to a matter appropriately presented. CONCEPT REVIEW: The emphasis-of-matter paragraph follows the opinion paragraph and states that the auditor's opinion is not modified, but that the matter is to be emphasized.
Going Concern Opinion -- *The accompanying...* Auditor Discretionary Circumstances -- *As discussed in Note XX to the financial statements, the Company is a defendent in a lawsuit...* Principles Not Consistently Applied -- *As discussed in Note XX to the financial statements, the Company adopted SFAS XXX as of December....*
If the auditors decide to present separate reports on the entity's financial statements and internal control over financial reporting, which of the following should be modified to refer to the other report? Report on Financial Statements Report on Internal Control over Financial Reporting a. Yes Yes b. Yes No c. No Yes d. No No Multiple Choice Option D Option C Option B Option A
Option A
When reporting under GAAS, certain statements are required in all auditors' reports ("explicit") and others are required only under certain conditions ("implicit"). Which combination that follows correctly describes the auditors' responsibilities for reporting? (a) (b) (c) (d) 1. GAAP Explicit Explicit Implicit Implicit 2. Consistency Implicit Explicit Explicit Implicit 3. Going concern Implicit Implicit Explicit Explicit 4. Opinion Explicit Explicit Implicit Implicit Multiple Choice Option A Correct Option B Option C Option D
Option A
When financial statements are presented in comparative form and another firm audited the prior years' financial statements (but the other firm's report is not presented with the financial statements), the auditors' report on the current-year financial statements should Multiple Choice Not refer to the prior years' financial statements. Refer to any procedures performed by the current auditor to verify the opinion on the prior years' financial statements. Refer to the report and type of opinion issued by the other firm on the prior years' financial statements. Correct Disclaim an opinion on the prior years' financial statements.
Refer to the report and type of opinion issued by the other firm on the prior years' financial statements. Correct
If the opinion issued on prior years' financial statements is no longer appropriate and financial statements are presented in comparative form, the auditors' current report should Multiple Choice Not reference the prior years' financial statements. Indicate that the opinion on the prior years' financial statements cannot be relied upon. Express the revised opinion on the prior years' financial statements without referencing the previously-issued opinion. Reference the type of opinion issued on the prior years' financial statements and indicate that the current opinion on these financial statements differs from that expressed in the prior years.
Reference the type of opinion issued on the prior years' financial statements and indicate that the current opinion on these financial statements differs from that expressed in the prior years.
When component auditors are involved in the audit of group financial statements, the group auditors may issue a report that Multiple Choice Names the component auditors, describes their work, and presents only the group auditors' report. Places primary responsibility for the reporting on the component auditors. Does not consider or evaluate the component auditors' work but expresses an unmodified opinion in a standard report. Refers to the component auditors, describes the extent of the component auditors' work, and expresses an unmodified opinion.
Refers to the component auditors, describes the extent of the component auditors' work, and expresses an unmodified opinion.
How is the auditors' responsibility for expressing the opinion on financial statements disclosed in the standard (unmodified) report for a nonpublic company? Multiple Choice Unstated but understood in the Auditor's Responsibility section. Stated explicitly in the opinion paragraph. Stated explicitly in the introductory paragraph. Stated explicitly in the Auditor's Responsibility section.
Stated explicitly in the Auditor's Responsibility section.
Under which of the following conditions can a disclaimer of opinion never be issued? Multiple Choice The entity does not allow the auditors access to evidence about important accounts. The auditors have determined that the entity uses the NIFO (next-in, first-out) inventory costing method. Correct The entity's going-concern problems are highly material and pervasive. The auditors own stock in the entity.
The auditors have determined that the entity uses the NIFO (next-in, first-out) inventory costing method. Correct
R. Wolfe became the new auditor for Royal Corporation, succeeding C. Mason, who audited the financial statements last year. Wolfe needs to report on Royal's comparative financial statements and should disclose in the report an explanation about other auditors having audited the prior year Multiple Choice To describe the audit and the opinion and name Mason as the predecessor auditor. To describe the audit but not reveal the type of opinion issued by Mason. Only if Mason's opinion last year was qualified. To describe the prior audit and the opinion but not name Mason as the predecessor auditor.
To describe the prior audit and the opinion but not name Mason as the predecessor auditor.
The auditors determined that the entity is suffering financial difficulty and its going-concern status is seriously in doubt. Assuming that the entity adequately disclosed this matter in the financial statements, the auditors must choose between which of the following auditors' report alternatives? Multiple Choice Qualified opinion or adverse opinion. Standard (unmodified) report or adverse opinion. Unmodified opinion with a reference to going-concern or disclaimer of opinion. Correct Standard (unmodified) report or a disclaimer of opinion.
Unmodified opinion with a reference to going-concern or disclaimer of opinion. Correct
