Chapter 17 Smartbook

A material and pervasive departure from GAAP requires a basis for modification paragraph and a(n) ______. Multiple choice question. modified opinion that states except for the effects of the matters in the basis for modification paragraph adverse opinion disclaimer of opinion

adverse opinion

True or false: A basis-of-modification paragraph due to omitted information must include the omitted information.

False

True or false: A situation involving an uncertainty may also involve a scope limitation.

True

Additional circumstances that may result in an unmodified opinion with an emphasis-of-matter paragraph include ______. Multiple select question. a change in accounting principle the auditors disagree with a major catastrophe with significant effects significant transactions with related parties unusually important subsequent events

a major catastrophe with significant effects significant transactions with related parties unusually important subsequent events

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

tems that may be considered KAMs (CAMs) include ______. Multiple select question. going concern assessments the allowance for sales returns loss on the sale of an asset income taxes goodwill impairment

going concern assessments the allowance for sales returns income taxes goodwill impairment

Conditions that may raise substantial doubt about the going-concern assumption include ______. Multiple select question. work stoppages an insured catastrophe legal proceedings adverse financial ratios

work stoppages legal proceedings adverse financial ratios

For a nonpublic company, a qualified departure from GAAP requires a(n) _______for modification paragraph and changes to the ________paragraph.

basis opinion

If substantial doubt regarding Going Concern status remains after considering management's plans, auditors ______ opinion. Multiple choice question. may still issue an unmodified must issue an adverse must issue a qualified must disclaim an

may still issue an unmodified

If there are material departures from GAAP in the financial statements, auditors must _____ the audit report.

modify

The PCAOB requires that critical audit matters (CAMs) ______. Multiple choice question. be reported for all periods for which financial statements are presented only be reported when the auditors issue a qualified or adverse opinion only be reported for the period being audited

only be reported for the period being audited

Which of the following statements is correct? Multiple choice question. Both KAMs and CAMs are selected from matters communicated to those charged with governance. Based on AICPA and PCAOB standards, the matters communicated to those charged with governance should be identical. Based on the definitions, the items identified as KAMs should be identical to those identified as CAMs.

Both KAMs and CAMs are selected from matters communicated to those charged with governance.

True or false: An auditor is required to add an emphasis-of-matter paragraph for all uncertainties.

False

True or false: CAM and KAM sections are optional when either an adverse or disclaimer of opinion is issued.

False

In the United States, financial statements are most frequently prepared following the general-purpose framework of ______. Multiple choice question. GAAS GAAP tax basis IFRS

GAAP

If auditors have formed an opinion that the financial statements are materially and pervasively misstated, a(n) ______ opinion is appropriate. Multiple choice question. adverse disclaimer of qualified

adverse

When the financial statements are not fairly presented in conformity with generally accepted accounting principles, auditors issue a(n) ______ opinion.

adverse

CAM and KAM sections are omitted from audit reports when ______ issued. Multiple choice question. adverse and disclaimer of opinions are only when an adverse opinion is only when a disclaimer of opinion is

adverse and disclaimer of opinions are

When comparative financial statements are presented by the client company, the auditors' report should ______. Multiple choice question. always disclaim an opinion on the prior years only cover all years if it is a continuing engagement always cover all years presented only cover all years if the audit opinions are the same for all periods

always cover all years presented

Financial statement disclosures regarding the firm's going concern status include all of the following except: Multiple choice question. pertinent conditions and events giving rise to substantial doubt audit procedures performed to identify and review going concern status management's evaluation and plan for dealing with the conditions possible discontinuance of operations

audit procedures performed to identify and review going concern status

A disclaimer of opinion ______. Multiple select question. should be avoided whenever possible as it avoids warning financial statement users about known problems cannot be issued when the auditors have formed an opinion on the financial statements should include any and all reservations auditors have about the statements may be used, in some circumstances, to avoid issuing an adverse opinion

cannot be issued when the auditors have formed an opinion on the financial statements should include any and all reservations auditors have about the statements

Group financial statements are those of a company that consists of more than one ______.

component

In group financial statements, issues arise when one or more subsidiaries are audited by ________ auditors other than the group auditors.

component

Multiple uncertainties that cause the auditor to conclude it's not possible to form an opinion on the financial statements may make a(n) ______ opinion appropriate. Multiple choice question. disclaimer of unmodified qualified adverse

disclaimer of

PCAOB standards state that when a significant scope limitation is imposed by the client, the auditors should ordinarily issue a(n) ______ opinion. Multiple choice question. disclaimer of unmodified adverse qualified

disclaimer of

Auditors that are responsible for issuing the audit report on a group of companies (e.g. a parent and its subsidiaries) are known as ______ auditors. Multiple choice question. major group component

group

When predecessor auditors have audited the prior-period financial statements for a comparative period, the current auditor may have the predecessor auditor reissue their audit report for the prior period or they can ______. Multiple choice question. issue a disclaimer of opinion on the prior year include an other-matter paragraph to the current audit report issue a qualified opinion on both years

include an other-matter paragraph to the current audit report

For a nonpublic company, a matter leading to a qualified opinion ______ considered a KAM. Multiple choice question. may or may not be is always

is always

When, after considering management's plans, substantial doubt about the company's going concern status does not remain, an Emphasis of Matter section ______. Multiple choice question. should not be added to the report must still be added to the report may be added at the auditors' discretion

may be added at the auditors' discretion

For scope limitations that have a material but not pervasive effect on the financial statements, auditors should issue a report that includes modifications to the ______ sections. Multiple select question. management's responsibility opinion auditor's responsibility basis for opinion

opinion basis for opinion

To evaluate consistent application of GAAP when reporting on only the current period, auditors should consider the current period under audit and the preceding ______. Multiple choice question. two periods three periods five periods period

period

An adverse opinion is appropriate if a material misstatement is considered ______.

pervasive

An opinion that states the financial statements are presented in conformity with GAAP "except for" the effects of some matter is referred to as a(n) ______ opinion.. Multiple choice question. adverse unmodified disclaimer of qualified

qualified

An opinion that states the financial statements are presented in conformity with GAAP "except for" the effects of some matter is referred to as a(n) ______ opinion.. Multiple choice question. unmodified adverse disclaimer of qualified

qualified

If the auditors of a nonpublic company decide that the possible effects on the financial statements of undetected misstatements, if any, could be material but not pervasive, a(n) ______ opinion is appropriate. Multiple choice question. adverse disclaimer of unmodified qualified

qualified

For auditors that are reporting on two periods, consistency of GAAP application should be evaluated between the current period and the preceding ______. Multiple choice question. three periods two periods period only five periods

two periods

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

When the auditors have obtained sufficient appropriate audit evidence to conclude that the financial statements, taken as a whole, are not materially misstated and there is no need to disclose additional information, they will issue a(n) _____ opinion.

unmodified

An audit report that states the auditors do not express an opinion on the financial statements is called a(n) ______ opinion Multiple choice question. qualified adverse disclaimer of unmodified

disclaimer of

When there is substantial doubt about a company's going concern status, GAAP has not been consistently applied, or there are other circumstances such as an unusually important subsequent event, additional information ______. Multiple choice question. must always be added to the unmodified audit report is added to the unmodified audit report at the auditors' discretion may or may not be required to be added to the unmodified audit report

may or may not be required to be added to the unmodified audit report

Auditors who want to emphasize significant client transactions with related parties can issue a(n) ______. Multiple choice question. qualified opinion with an emphasis-of-matter paragraph disclaimer of opinion unmodified opinion with an emphasis-of-matter paragraph qualified opinion

unmodified opinion with an emphasis-of-matter paragraph

Group auditors that make no reference to the component auditors should issue a(n) ______. Multiple choice question. unmodified report qualified opinion unmodified opinion with an emphasis-of-matter paragraph

unmodified report

Re-expressing or revising an audit opinion that was previously issued is referred to as _____ the report.

updating

For a public company, a matter leading to a qualified opinion ______ considered a CAM. Multiple choice question. may be is never is always

may be

In a shared responsibility report, the ______ sections of the audit report are modified. Multiple select question. management's responsibility introduction opinion auditor's responsibility

opinion auditor's responsibility

When a company that is in the process of, or about to liquidate is still following the going-concern basis of accounting, the result is ordinarily either a(n) ________ or _____ opinion.

qualified adverse

A qualified opinion is issued when auditors are unable to obtain sufficient appropriate audit evidence on which to base the opinion because of a(n) _____ limitation.

scope

A lawyer who refuses to provide appropriate information for a case that has not yet been settled creates a(n) ______ for the auditor. Multiple choice question. uncertainty scope limitation

scope limitation

The term "explanatory paragraph" is used by __. Multiple choice question. neither public nor nonpublic companies nonpublic companies only public companies only both public and nonpublic companies

public companies only

Disclosure requirements come from pronouncements issued by ______. Multiple select question. FASB PCAOB GASB AICPA

FASB GASB

Financial statements that cover one or more prior periods are called _____ financial statements.

comparative

An unmodified opinion with additional audit-related information included in the audit report is appropriate when ______. Multiple choice question. there is substantial doubt about a company's ability to continue as a going concern a report is filed with comparative statements when there are predecessor auditors a company changes an accounting principle that has an immaterial effect on the financial statements

a report is filed with comparative statements when there are predecessor auditors

A disclaimer of opinion is most frequently the result of ______. Multiple choice question. a departure from GAAP that results in a material, but not pervasive misstatement a scope limitation that leaves auditors unable to obtain sufficient appropriate audit evidence deficiencies in the financial statements that are considered pervasive

a scope limitation that leaves auditors unable to obtain sufficient appropriate audit evidence

When the report on a public company is qualified for a departure from GAAP, the modification involves ______. Multiple choice question. disclaiming any information related to the departure adding a basis of qualified opinion paragraph immediately above the opinion paragraph adding an additional untitled paragraph after the opinion paragraph

adding an additional untitled paragraph after the opinion paragraph

For departures from GAAP due to the omission of information that is material and pervasive, auditors should issue a(n) ______ opinion. Multiple choice question. adverse unmodified qualified disclaimer of

adverse

When auditors believe a change in accounting principle does not meet one or more of the four requirements, appropriate audit opinions are ______. Multiple select question. adverse disclaimer of unmodified with an emphasis-of-matter paragraph qualified

adverse qualified

If auditors have substantial doubt about a company's ability to continue as a going concern and management's disclosures are materially inadequate, appropriate audit opinions are a(n) ______. Multiple select question. adverse opinion qualified opinion disclaimer of opinion unmodified opinion with an emphasis-of-matter

adverse opinion qualified opinion

For a change in accounting principle, the client must report in the note to the financial statements all of the following except the ______ the change. Multiple choice question. nature of auditor's approval of justification for effect of

auditor's approval of

Limitations on the scope of the audit may occur due to all of the following except ______. Multiple choice question. client refusal to allow confirmations to be sent to customers auditor-imposed limitations circumstances beyond the control of the client circumstances related to the nature and timing of the auditor's work

auditor-imposed limitations

The PCAOB audit report for large public companies includes an additional paragraph indicating ______. Multiple choice question. auditors also have issued a report on the client's internal control over financial reporting more detailed discussion of the responsibility of auditors in a PCAOB audit auditors are independent of the client and the board of directors

auditors also have issued a report on the client's internal control over financial reporting

The complete set of financial statements generally include a(n) ______. Multiple select question. balance sheet trial balance report statement of cash flows income statement statement of budget to actual expenditures

balance sheet statement of cash flows income statement

Publicly owned companies are required to include ______ for each of the last two years in their annual reports. Multiple choice question. balance sheets statements of retained earnings statements of income statements of cash flows

balance sheets

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

component

To evaluate whether there is substantial doubt about a client's ability to continue as a going concern, auditors should ______. Multiple choice question. inquire of employees as to their opinion of the company's ability to continue design separate audit procedures to be performed at the end of the audit consider results of audit procedures performed during the audit

consider results of audit procedures performed during the audit

For each critical audit matter (CAM), the auditors must include in the audit report ______. Multiple select question. description of how the matter was addressed in the audit description of the audit committee's response to the CAM reference to the accounts and disclosures affected identification of the matter principal considerations that led the auditor to determine it is a CAM

description of how the matter was addressed in the audit reference to the accounts and disclosures affected identification of the matter principal considerations that led the auditor to determine it is a CAM

A scope limitation that does not allow the auditors to obtain sufficient appropriate audit evidence for a substantial proportion of the financial statements should result in a(n) ______ opinion. Multiple choice question. disclaimer of qualified adverse

disclaimer of

Primary circumstances that result in an audit report with an unmodified opinion but with additional financial statement-related information include ______. Multiple select question. inconsistent application of generally accepted accounting principles extensive use of estimates (bad debts, warranty expense, depreciation) in the preparation of the financial statements substantial doubt about the company's going concern status important subsequent events

inconsistent application of generally accepted accounting principles substantial doubt about the company's going concern status important subsequent events

An unqualified audit report for a public company must include "Report of ______ ______ Public Accounting Firm" in the title.

independent registered

When a company is in the process of, or about to discontinue operating, the _______ basis of accounting must be followed.

liquidation

Auditors issue a(n) adverse opinion when the deficiencies in the financial statements are both ______ and _______.

material pervasive

The decision on whether a scope limitation results in a qualified or disclaimer of opinion is whether misstatements or possible misstatements are both _____and ______.

material pervasive

The term "other-matter paragraph" is used by ______. Multiple choice question. both public and nonpublic companies public companies only nonpublic companies only neither public nor nonpublic companies

nonpublic companies only

The purpose of notes to financial statements is to ______. Multiple choice question. comply with GAAS requirements properly disclose information required by GAAP correct improper financial statement presentation

properly disclose information required by GAAP

Substantial doubt exists when conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they before due for a(n) _______ period of time.

reasonable

Modified opinions are required when there is a ______. Multiple select question. scope limitation group financial audit that uses component auditors change in accounting principle departure from GAAP

scope limitation departure from GAAP

When, after considering management's plans, substantial doubt about the company's going concern status still remains, auditors ______ add a Going Concern section to the report. Multiple choice question. should should not

should not

When two or more CPA firms are involved in the audit of group financial statements, the unmodified opinion audit report is ______ modified to include reference to CPA firms considered component auditors. Multiple choice question. never sometimes always

sometimes

Audit considerations for client-imposed limitations include ______. Multiple select question. determining whether to not to report the limitations to those changed with governance the assessment of fraud risk determining whether or not to withdraw from the engagement

the assessment of fraud risk determining whether or not to withdraw from the engagement

A major assumption underlying the inclusion of an emphasis-of-matter paragraph for an uncertainty is ______. Multiple choice question. the auditor has obtained evidence regarding the outcome management has approved the paragraph the matter is adequately disclosed in the notes

the matter is adequately disclosed in the notes

Auditors evaluate changes in accounting principles to determine if ______. Multiple select question. the method of accounting for the effect of the change is in conformity with GAAP the disclosures related to the change are adequate the change improves the reported results of the company the newly adopted principle is generally accepted

the method of accounting for the effect of the change is in conformity with GAAP the disclosures related to the change are adequate the newly adopted principle is generally accepted

For comparative financial statements, the auditor can issue an opinion that cover both years if ______. Multiple choice question. predecessor auditors issued an unmodified opinion on the prior year the audit opinion was unmodified in the prior year the prior year was audited by the firm

the prior year was audited by the firm

Auditors must modify the audit report if ______. Multiple select question. the auditors choose to omit certain procedures or perform alternative procedures when gaining evidence there are material departures from GAAP there is a lack of consistency in the application of GAAP the auditors are unable to obtain sufficient appropriate audit evidence

there are material departures from GAAP there is a lack of consistency in the application of GAAP the auditors are unable to obtain sufficient appropriate audit evidence

If a client changes depreciation methods but the change is immaterial, the auditor should issue a(n) ______. Multiple choice question. disclaimer of opinion unmodified opinion unmodified opinion with an emphasis-of-matter paragraph qualified opinion

unmodified opinion