Auditing: Chapter 15 - Audit Reports for Financial Statement Audits
(15-19) Which of the following items would not be included in a PCAOB audit report that includes CAMs? a. Identification of the CAM. b. Description of the principal considerations that led the auditor to determine that the matter is a CAM. c. Indication as to whether management agreed that the matter was a CAM. d. Description of how the CAM was addressed in the audit. e. Reference to the relevant financial statement accounts or disclosures.
c. Indication as to whether management agreed that the matter was a CAM.
(15-16) Which of the following phrases should an auditor not use when qualifying the audit opinion? a. With the exception of b. Except for c. Subject to d. Any of the above phrases would be appropriate.
c. Subject to
(15-8) Which of the following would require other than an unqualified opinion? a. The client has prepared its financial statements using IFRS as the financial reporting framework. b. The auditor has complied with the auditing standards of both the AICPA and the IAASB. c. The auditor is not independent. d.The auditor believes that the client will remain a going concern for a reasonable period of time.
c. The auditor is not independent.
Which of the following requires that key audit matters (KAMs) be included in audit reports, effective for audits of financial statements for periods ending on or after December 15, 2016? a. Standards issued by PCAOB and IAASB. b. Standards issued by AICPA's Auditing Standards Board. c. Standards issued by PCAOB. d. Standards issued by IAASB.
d. Standards issued by IAASB.
Which of the following phrases should not be used when the auditor is qualifying the audit opinion? a. With the exception of. b. With the qualification of. c. Except for. d. Subject to.
d. Subject to.
Critical Audit Matter
Any matter that was communicated or required to be communicated to the audit committee, relating to accounts or disclosures material to the financial statements, and involving especially challenging, subjective, or complex auditor judgment.
(15-1) T or F The auditor should provide an audit report on the financial statements only if the audit opinion indicates that the financial statements are fairly stated in all material respects.
False
(15-10) T or F International auditing standards generally permit the auditor to refer to other auditors in the auditor's report, while the U.S. auditing standards allow this reference only if required by law or regulation.
False
(15-14) T or F When the auditor issues a disclaimer because of a lack of independence, the audit report must state the lack of independence, and must describe the reasons for the lack of independence.
False
(15-17) T or F All audit reports issued under the guidance of ISA 701, Communicating Key Audit Matters in the Independent Auditor's Report, will include one or more KAMs.
False
(15-18) T or F ISA 701, Communicating Key Audit Matters in the Independent Auditor's Report, mandates the order of presentation of KAMs.
False
(15-21) T or F The auditor issues an adverse opinion on ICFR if the client has one or more significant deficiencies in ICFR.
False
(15-22) T or F If the auditor is conducting an integrated audit, the auditor must provide both opinions in the same report.
False
(15-26) T or F If after the audit report was issued, the auditor discovers that an important audit procedure was not performed, SOX requires that the auditor file a Form 8-K with the SEC.
False
(15-5) T or F If an auditor conducts an audit in accordance with multiple auditing standards in their entirety, the auditor can only mention one set of standards in the audit report.
False
Under international auditing standards, when the audit client has engaged other audit firms to audit remote locations around the country, the principal auditor must mention the other audit firms in the audit report. a. True b. False
b. False
When circumstances preclude an auditor from performing certain procedures and the auditor can be satisfied using other alternative procedures, a disclaimer of opinion will be issued. a. True b. False
b. False
(15-7) In which of the following situations would an auditor ordinarily issue an unqualified audit opinion without any report modifications? a. The auditor wishes to emphasize that the client had significant related party transactions. b. The auditor complies with only one set of auditing standards. c. The client issues financial statements that present financial position and results of operations, but omits the statement of cash flows. d. The auditor has substantial doubt about the client's ability to continue as a going concern, and the circumstances are fully disclosed in the financial statements.
b. The auditor complies with only one set of auditing standards.
After an audit report is issued, the auditor discovers through a peer review that an important audit procedure has been omitted. In this case, what should the auditor do? a. Contact his or her professional liability insurance carrier. b. Notify all parties known to be relying on the report. c. Determine whether the report can still be supported in light of the omitted procedure. d. Immediately request the client recall the report.
c. Determine whether the report can still be supported in light of the omitted procedure.
(15-9) T or F If an auditor decides to include additional language in the audit report because of concerns about the client's ability to remain a going concern, the additional language should include the terms material doubt and going concern.
False
Auditing standards require auditors to provide ____________________.
Positive Assurance
Unqualified Opinion
The opinion expressed by the auditor when the auditor concludes that the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework.
When an auditor lacks independence with respect to a client, which of the following should the auditor issue? a. A disclaimer of opinion. b. An adverse opinion. c. A qualified opinion with explanatory paragraph. d. An unqualified opinion.
a. A disclaimer of opinion.
(15-4) Which of the following statements is true regarding the auditor's responsibilities related to reporting? a. Auditors should obtain sufficient appropriate evidence to provide a reasonable basis for the opinion regarding the financial statements under audit. b. The audit opinion relates only to the client's financial statements, and does not relate to the required footnote disclosures. c. If the auditor has reservations about the fairness of presentation of the financial statements, the auditor does not need to provide the reason for this reservation, but needs to only state that the financial statements are not fairly presented. d. All of the above statements are true.
a. Auditors should obtain sufficient appropriate evidence to provide a reasonable basis for the opinion regarding the financial statements under audit.
What are some of the conditions or factors of a unqualified report?
- there are no material violations of generally accepted accounting principles (GAAP) - disclosures are adequate - the auditor was able to perform all of the necessary procedures - there was no change in accounting principles that had a material effect on the financial statements - the auditor does not have significant doubt about the client remaining a going concern - the auditor is independent
What are the 8 components of the audit report?
1. Title and Addressee 2. What was audited (introductory paragraph) 3. Responsibilities of client management (management's responsibility paragraph; should include the heading "Management's Responsibility for the Financial Statements") 4. Responsibilities of the auditor and the nature of the audit process (auditor's responsibility paragraph; should include the heading "Auditor's Responsibility") 5. The auditor's opinion on the fairness of the financial statements (opinion paragraph; should include the heading "Auditor's Opinion") 6. Signature of the auditor 7. Auditor's Address 8. Date of the Auditor's Report
Key Audit Matter
A matters that, in the auditor's professional judgment, was of most significance in the audit of the financial statements of the current period. Key audit matters are selected from matters communicated to those charged with governance.
Emphasis-of-matter paragraph
A paragraph included in the auditor's report that is required by GAAS, or is included at the auditor's discretion, and that refers to a matter appropriately presented or disclosed in the financial statements that, in the auditor's professional judgment, is of such importance that it is fundamental to users' understanding of the financial statements
Other-Matter paragraph
A paragraph included in the auditor's report that is required by GAAS, or is included at the auditor's discretion, and that refers to a matter other than those presented or disclosed in the financial statements that, in the auditor's professional judgment, is relevant to users' understanding of the audit, the auditor's responsibilities, or the auditor's report.
Pervasive
A term used in the context of misstatements to describe the effects or the possible effects on the financial statements of misstatements that are undetected due to an inability to obtain sufficient appropriate audit evidence.
Positive Assurance
An explicit statement as to whether the financial statements are presented fairly.
(15-13) T or F The primary reason for issuing an adverse audit opinion is that the client's financial statements contain a pervasive and material unjustified departure from GAAP.
True
(15-2) T or F The auditor should provide the audit opinion in a written report.
True
(15-25) T or F An example of a situation in which the auditor discovers omitted procedures after the audit report was issued would be one in which the auditor failed to confirm receivables, and this fact comes to light as part of an internal review program.
True
(15-6) T or F Under guidance issued by the PCAOB in 2017, the audit report should include a statement indicating how long the audit firm has served as the company's auditor.
True
(15-28) If it is discovered after the audit report is issued that the auditor failed to confirm receivables, which of the following statements is true? a. The auditor should try to examine subsequent collections of accounts receivable to help determine whether the accounts receivables existed and whether they were properly valued at the balance sheet date. b. The auditor must resign immediately. c. The auditor must notify the SEC immediately. d. The auditor must notify users of the financial statements immediately.
a. The auditor should try to examine subsequent collections of accounts receivable to help determine whether the accounts receivables existed and whether they were properly valued at the balance sheet date.
In which one of the following cases would an auditor most likely issue a qualified opinion? a. There is one material departure from GAAP that affects only two accounts. b. There is an immaterial dollar misstatement on the financial statements. c. There is a change in accounting principles promulgated by the FASB. d. There is a highly material, and very pervasive departure from SFAS No. 141 and No. 142.
a. There is one material departure from GAAP that affects only two accounts.
A client that treats a material lease transaction as an operating lease when it is in fact a capital lease has deviated from GAAP and will receive a qualified or adverse opinion. a. True b. False
a. True
An unqualified audit opinion with an explanatory paragraph often makes reference to the footnotes of the financial statements a. True b. False
a. True
For a change in accounting principles that management does not justify to the auditor, the auditor will likely choose between a qualified and an adverse opinion. a. True b. False
a. True
If the auditor concludes that the financial statements taken as a whole are not fairly presented, the auditor should issue an adverse opinion. a. True b. False
a. True
The PCAOB's reporting standard AS 3101 adopted in 2017 retains the "pass/fail" opinion that has been in effect for many decades. a. True b. False
a. True
The client will not allow Collier and Company, CPAs, to read the minutes of the board of director's meetings that occurred during the year under audit. Such a limitation will usually result in the auditor issuing a disclaimer. a. True b. False
a. True
The phrase "substantial doubt about the company's ability to continue as a going concern" is used in an unqualified opinion with an additional paragraph explaining the auditor's conclusions regarding the going concern assumption. a. True b. False
a. True
When financial statements contain generally accepted accounting principles in the current year that are different from the generally accepted accounting principles used in the preceding year, the auditor will typically make mention of it in the report. a. True b. False
a. True
PCAOB guidance does not identify which of the following situations as one in which the auditor will modify the audit report on ICFR effectiveness? a. When the annual report includes a copy of the annual certification pursuant to Section 302 of the Sarbanes-Oxley Act. b. When there is other information contained in management's annual report on ICFR. c. When elements of management's annual report on internal control are incomplete or improperly presented. d. When there is a restriction on the scope of the engagement.
a. When the annual report includes a copy of the annual certification pursuant to Section 302 of the Sarbanes-Oxley Act.
A client that has a departure from generally accepted accounting principles that is immaterial will receive a qualified or adverse opinion. a. True b. False
b. False
IAASB standards require disclosure of key audit matters (KAMs) related to five specific topics. a. True b. False
b. False
If an omission of an important audit procedure is discovered, the auditor should immediately issue a disclaimer of opinion for the audit. a. True b. False
b. False
If the firm auditing a company realizes that it is not independent with respect to the client, it will issue a disclaimer of opinion based on the inherent GAAP violation imposed by the audit firm. a. True b. False
b. False
The decision about whether to make reference to another auditor in the report on the audit of ICFR does not differ from the corresponding decision as it relates to the audit of the financial statements. a. True b. False
b. False
(15-24) Refer to the Why It Matters feature "Situations Requiring a Modification to the Audit Report on ICFR." In which of the following situations would the auditor modify the audit report on ICFR? a. The auditor identifies multiple unrelated significant deficiencies in ICFR. b. The auditor concludes that management's report on ICFR is not complete or is improperly presented. c. The unaudited financial statements did not contain any misstatements. d. The auditor would modify the audit report on ICFR in all of the above situations.
b. The auditor concludes that management's report on ICFR is not complete or is improperly presented.
What can a user of financial statements infer from an unqualified opinion on the financial statements? a. The auditor found no instances of error or fraud. b. The auditor has no reservations about the fairness of presentation. c. The auditor is satisfied that management is both credible and competent. d. All of the above can be inferred by the user.
b. The auditor has no reservations about the fairness of presentation.
(15-12) Eagle Company's financial statements contain a departure from GAAP because, due to unusual circumstances, the statements would otherwise be misleading. Which of the following is descriptive of the type of audit report the auditor should provide? a. Unqualified opinion, with no mention of the departure in the auditor's report. b. Unqualified opinion, with a description of the departure in the audit report. c. Either a or b d. Neither a nor b
b. Unqualified opinion, with a description of the departure in the audit report.
Which of the following is not a change included in PCAOB's new reporting standard AS 3101? a. Specific mention of comprehensive income and notes to the financial statements. b. A new disclosure that includes the year in which the audit firm began serving consecutively as the client's auditor. c. A new report title, "Report of Independent Registered Public Accounting Firm." d. An affirmative statement that the audit firm is registered with the PCAOB.
c. A new report title, "Report of Independent Registered Public Accounting Firm."
When an auditor issues an adverse opinion, which of the following should be included in the opinion paragraph? a. The financial statement effects of the departure from GAAP. b. The reasons that the financial statements are misleading. c. A reference to a separate paragraph that describes the reason for the adverse opinion. d. A statement that indicates that the financial statements are fairly stated except for a reason that is described in the separate paragraph.
c. A reference to a separate paragraph that describes the reason for the adverse opinion.
The opinion paragraph of the audit report for Schnook Co. states that the financial statements "do not present fairly." Which type of audit opinion is this? a. Qualified. b. Improper. c. Adverse. d. Disclaimer.
c. Adverse.
A justified departure from GAAP may result in which of the following? a. A qualified opinion. b. An adverse opinion. c. An unqualified audit opinion with an explanatory paragraph. d. A disclaimer of an audit opinion.
c. An unqualified audit opinion with an explanatory paragraph.
(15-23) The auditor of a large U.S. public company is conducting an integrated audit and has determined that a material weakness exists in the client's ICFR. Which of the following statements is true? a. The auditor is required to issue an adverse opinion on the financial statements. b. The auditor should express an adverse opinion on internal controls only if a material misstatement was found in the financial statements. c. The auditor should express an adverse opinion on ICFR, even if no material misstatements were found in the financial statements. d. The auditor is not required to express an opinion on internal controls.
c. The auditor should express an adverse opinion on ICFR, even if no material misstatements were found in the financial statements.
In which one of the following instances would an auditor not issue a disclaimer of opinion? a. The auditors are not invited to observe the periodic inventory at year-end. b. There is insufficient evidence for the auditor to form an opinion on the fairness of the financial statements. c. There are significant misstatements in the financial statements. d. There is a significant limitation on the scope of the engagement.
c. There are significant misstatements in the financial statements.
(15-15) Tech Company has an uncertainty because of pending litigation. The auditor decided to issue a qualified opinion rather than an unqualified opinion. Which of the following factors most likely influenced this decision? a. Inconsistent application of GAAP. b. Inability to estimate the amount of loss. c. The client's lack of experience with such litigation. d. Adequacy of the disclosures.
d. Adequacy of the disclosures.
Which of the following statements is true regarding audit reporting? a. The auditor should provide an opinion based on the audit evidence obtained. b. Auditing standards require auditors to provide positive assurance. c. The auditor's opinion should state whether the financial statements are presented fairly. d. All of the above statements are true.
d. All of the above statements are true.
(15-27) Which of the following statements is true when an omitted audit procedures is discovered after the audit report was issued? a. After the audit report has been issued, the auditor may discover that an important audit procedure was not performed. b. Such an omission may be discovered when audit documentation is reviewed as part of an external or internal review program. c. The auditor should decide whether the previously issued audit report can still be supported in light of the omitted procedures. d. All of the above.
d. All of the above.
(15-11) In which of the following situations would an auditor typically issue an unqualified opinion, but modify the audit report to include additional language? a. The client has changed an accounting principle, has reasonable justification for the change, and has followed GAAP in accounting for and disclosing the change. b. The auditor has substantial doubt about the client being a going concern. c. The client has had significant transactions with related parties that the auditor wants to emphasize. d. An auditor would typically issue an unqualified opinion, but include additional language, in all of the above situations.
d. An auditor would typically issue an unqualified opinion, but include additional language, in all of the above situations.
(15-3) Which of the following statements is false regarding audit reporting? a. Auditing standards require auditors to provide positive assurance—that is, an explicit statement as to whether the financial statements are presented fairly. b. The auditor should provide an opinion in accordance with the auditor's findings or state that an opinion cannot be expressed. c. The auditor's opinion should state whether the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework. d. None of the above statements are false.
d. None of the above statements are false.
(15-20) As part of identifying CAMs, which of the following factors would an auditor consider when determining whether a matter involved especially challenging, subjective, or complex auditor judgment? a. The auditor's assessment of the risks of material misstatement, including significant risks. b. The nature and timing of significant unusual transactions and the extent of audit effort and judgment related to requisite transactions. c. The degree of auditor subjectivity in applying audit procedures to address the matter or in evaluating the results of those procedures. d. The auditor would consider all of the above factors.
d. The auditor would consider all of the above factors.
In which one of the following instances would an auditor most likely issue an adverse opinion? a. Management declines to present earnings per share in the income statement. b. The client does not allow the auditor to send confirmations to its three largest customers. c. There is substantial doubt about the entity's ability to continue as a going concern. d. There is a material dollar misstatement that is pervasive in the financial statements.
d. There is a material dollar misstatement that is pervasive in the financial statements.
In which of the following situations would the auditor modify the audit report on ICFR? a. When the auditor identifies multiple unrelated significant deficiencies in ICFR. b. When the auditor relies on the work of other auditors but decides not to include a reference to the other auditors. c. When the auditor is unable to perform all procedures needed to evaluate the internal controls. d. When the auditor concludes that management's report on ICFR is not complete or is improperly presented.
d. When the auditor concludes that management's report on ICFR is not complete or is improperly presented.