Chapter 18 Audit

The new PCAOB reporting standards include ______.

-a clearer description of management and auditor responsibilities -separate disclosure of critical audit matters -The opinion section is reported first -an explicit statement that the auditor is independent -the retention of the binary, pass/fair reporting approach -laying out the key features of an audit more clearly -a Basis of Opinion section

An auditor issues a qualified opinion when there is ______.

-a scope limitation -a specific departure from GAAP but overall the financial statements present fairly in conformity with GAAP

With regard to other information in documents containing audited financial statements, the auditor is required to ______.

-consider whether such information is consistent with the information in the audited financial statements -read the other information

An auditor issued a qualified opinion on prior-period financial statements due to lack of conformity with GAAP. The entity has fixed the issue in the current year and appropriately restated the prior-period financial statements. If the restated prior period statements are presented with the current statements as comparatives, the auditor should ______.

-express an unmodified opinion on the restated financial statements -disclose that the previously issued financial statements have been corrected and restated

Auditors express a qualified or adverse opinion for departures from GAAP including ______.

-inadequate disclosure -an unjustified change in accounting principle -use of an unacceptable accounting principle

If an auditor is not independent, the auditor ______.

-issues a two sentence report -must withdraw from the engagement or disclaim an opinion

Circumstances that likely will result in an audit opinion that departs from an unqualified opinion include ______.

-lack of auditor independence -a departure from GAAP -a scope limitation

Auditing standards define special purpose financial statements are those prepared under a(n) ______ basis.

-tax -cash -regulatory -contractual

When a circumstance such as a fire restricts the scope of the engagement, ______.

-the auditor can issue a standard unqualified opinion -alternative procedures can be used to gather sufficient appropriate evidence

When a scope limitation exists but overall the financial statements present fairly due in conformity with GAAP the auditor will ______.

-use the word "except for" in the report -issue a qualified opinion

When an auditor reports on an entity's compliance with certain contractual agreements or regulatory requirements, the auditor ______.

-uses a statement that in applying procedures "nothing came to the auditor's attention" -provides negative assurance only

Auditors can add explanatory language to the standard unqualified audit report by ______.

1) inserting an additional explanatory paragraph 2) adding explanatory wording to the existing paragraphs of the report

The auditor's standard unqualified audit report for a public company contains the ______.

1. Report Title 2. Addressee 3. the Opinion Section 4. the Basis for Opinion Section 5. Critical Audit Matters Section 6. Name/Signature of the Audit Firm 7. an indication of how long the auditor has served as the company's auditor 8. the audit report location and date

Before reissuing a report on the financial statements of prior periods which will be presented for comparative purposes, a predecessor auditor should ______.

1. read the current-period financial statements 2. compare the prior-period financial statements on which the predecessor reported with the current-year statements on which the successor will report 3. obtain a letter of representations from management of the entity and from the current-year, successor auditor

In order to be identified as a CAM, a matter must _______.

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

Special purpose financial statements prepared under a(n) ___________basis comply with an agreement between th entity and one or more third parties other than the auditor.

Contractual

Any matters arising from the audit of financial statements that are communicated or required to be communicated, to the audit committee, that relate to material financial statement accounts or disclosures and involved especially challenging, subjective, or complex auditor judgment are called ________________________ matters.

Critical Audit Matters

Whenever the audit opinion is qualified, the opinion paragraph will include the words _______________________.

Except for

True or false: When an auditor reports on an entity's compliance with certain contractual agreements or regulatory requirements, the auditor uses the words "In our opinion...." in the audit report.

False Only negative assurance is provided "nothing came to our attention...."

True or false: Prior period statements received a qualified or adverse opinion because the entity did not follow GAAP. If the entity conforms to GAAP in the current year and restates the prior-period results, the auditor must still express a qualified opinion on the restated prior-period financial statements if they are presented with the current period statements as comparatives.

False The auditor should express an unmodified opinion of the restated prior-period financial statements.

When an auditor adds explanatory wording to the existing paragraphs of the report it is referred to as _____________________wording.

Modified Wording

Generally, the procedures applied in an audit of an element, account, or item are ______ than if the same information were considered part of an audit of the overall financial statements.

More extensive

The procedures applied are more extensive when ______.

a separate engagement is performed on an element, account, or item

When an auditor is not independent, the reason(s) for the lack of independence should ______ ASB standards. a. not be stated under PCAOB standards, but may be stated under b. be stated under both PCAOB and c. be stated under PCAOB standards, but should not be stated under d. not be stated under PCABOB or

a. not be stated under PCAOB standards, but may be stated under

When a client significantly restricts the scope of the engagement ______. a. the auditor should consider disclaiming an opinion b. alternative procedures must be used to gather sufficient appropriate evidence c. the audit fee should be adjusted since less work will be performed d. the auditor should issue a qualified opinion with explanation

a. the auditor should consider disclaiming an opinion

When there is a lack of consistency in the application of accounting principles due to accounting changes, an auditor ______.

adds an explanatory paragraph to a standard unqualified audit report

The auditor is required to read the other information and consider whether such information is consistent with the information in the audited financial statements when ______.

an entity publishes documents that contain other information in addition to the audited financial statements

Under PCAOB standards ______ a. both explanatory and emphasis paragraphs are always optional b. explanatory paragraphs are sometimes required but emphasis paragraphs are always optional c. emphasis paragraphs are sometimes required but explanatory paragraphs are always optional d. both explanatory and emphasis paragraphs are sometimes required

b. explanatory paragraphs are sometimes required but emphasis paragraphs are always optional

When an entity has a departure from GAAP judged to be immaterial by the auditor, the auditor will most likely issue a(n) ______. a. disclaimer of opinion b. standard unqualified opinion c. opinion qualified for a scope limitation d. opinion qualified for a GAAP departure

b. standard unqualified opinion

When an entity issues comparative financial statements, _____ a. two separate audit reports must be issued and dated b. the audit report is the date of the most recently completed audit c. the audit report must be dual dated to encompass the ending of both audits

b. the audit report is the date of the most recently completed audit

When the auditor is not required to audit management's assessment of internal control over financial reporting, the auditor must ______. a. not mention internal control over financial reporting in the audit report b. qualify his or her audit opinion with an expect for c. add an explanatory paragraph to the audit report

c. add an explanatory paragraph to the audit report

When there is a lack of consistency in the application of accounting principles due to accounting changes, an auditor ______. a. disclaims an opinion on the current year financial statements due to a lack of consistency b. issues a qualified audit report stating "except for the change in accounting method described in Note XX" c. adds an explanatory paragraph to a standard unqualified audit report d. issues an adverse report on the entity's financial statements

c. adds an explanatory paragraph to a standard unqualified audit report

The principal auditor accepts full responsibility for the work done and conclusions drawn by other auditors when the ______. a. audit report refers to the work of other auditors b. auditor determines the other auditors were not independent of the entity c. other auditors did not conduct the majority of the audit work d. audit report does not refer to the work of other auditors

d. audit report does not refer to the work of other auditors

An inability to collect sufficient appropriate evidence is considered a(n): a. lack of auditor independence b. departure from GAAP c. lack of auditor competence d. scope limitation

d. scope limitation

When required supplementary information (RSI) is omitted to departs materially from the requirements of the applicable financial reporting framework the auditor must ______.

include an explanatory paragraph in the audit report

Generally, the materiality in an audit of an element, account, or item is set in relation to the ______.

individual element, account or item

An entity is issuing comparative financial statements. In prior years, the auditor expressed a standard unmodified report. This year the entity has inappropriately not capitalized certain lease obligations. The auditor should ______.

issue a report similar to a qualified report for a GAAP departure clarifying the departure only affects the current year's statements

Before reissuing a report on the financial statements of prior periods which will be presented for comparative purposes, a predecessor auditor should obtain a(n) -------------------from entity management and the current-year, successor auditor.

letter of representation

An auditor disclaimed an opinion on the prior period financial statements but was able to conduct the current year audit without limitations. In this case the auditor ______.

may issue an unmodified opinion on this year's statements

When an auditor reports on an entity's compliance with certain contractual agreements or regulatory requirements, the auditor provides _______________________________as to the entity's compliance with the requirements.

negative assurance

A predecessor auditor should obtain a letter of representations from the current-year, successor auditor when the predecessor auditor ______.

plans to reissue a report on the financial statements of prior periods presented for comparative purposes

If the financial statements are materially affected by a departure from GAAP, the auditor should express a(n) ______________or ____________opinion, depending on the pervasiveness of the misstatement.

qualified or adverse opinion

The principal auditor is sharing responsibility for the audit report with others auditors when ______.

there is a reference to the other auditors in the audit report

Pervasive effects on the financial statements are those that ______ of the financial statements.

1. include disclosures fundamental to users' understanding 2. are NOT confined to specific elements, accounts, or items 3. represent or could represent a substantial proportion

An auditor issues a standard unqualified audit report when ______.

1. the audit has been performed in accordance with applicable auditing standards 2. sufficient evidence has been gathered by the auditor 3. the auditor believes the financial statements conform to GAAP in all material respects

An auditor adds an explanatory paragraph to a standard unqualified report on an entity's financial statements when ______.

1. the auditor references the report on the audit of internal control for public companies. 2. the auditor decides to refer to the report of other auditors as the basis, in part, for the opinion 3. there is substantial doubt about an entity's ability to continue as a going concern

When the auditor is not required to audit management's assessment of internal control over financial reporting, the auditor must add an explanatory paragraph in the Basis for Opinion section indicating ______. A. the company was not required to have an audit of its ICFR B. the auditor takes no responsibility as related to ICFR C. no opinion on ICFR is being expressed

A and C

An ASB audit report ______. a. contains an opinion on the effectiveness of the entity's internal control over financial reporting b. indicates the audit was conducted in accordance with generally accepted auditing standards c. is titled "Report of Independent Registered Public Accounting Firm"

Correct b. indicates the audit was conducted in accordance with generally accepted auditing standards Incorrect a. contains an opinion on the effectiveness of the entity's internal control over financial reporting (This is true of a PCAOB report.) c. is titled "Report of Independent Registered Public Accounting Firm" (This is true of a PCAOB report.)

A PCAOB report ______. a. indicates the audit was conducted in accordance with generally accepted auditing standards b. recommends but does not mandate the disclosure of CAMs c. is titled "Report of Independent Registered Public Accounting Firm"

Correct c. is titled "Report of Independent Registered Public Accounting Firm" Incorrect a. indicates the audit was conducted in accordance with generally accepted auditing standards (This is true of an ASB report.) b. recommends but does not mandate the disclosure of CAMs (The disclosure of KAMs (Key Audit Matters) is recommended but not required in an ASB report.)

An auditor may choose to draw attention to significant transactions with related parties or unusually important subsequent events by adding a(n) ___________________________paragraph to the auditor's report.

Emphasis Paragraph

When the audit has been performed in accordance with applicable auditing standards, the auditor has gathered sufficient evidence, and the auditor believes that the financial statements conform to GAAP a(n)________________________ financial statement audit report is issued.

Standard Unqualified

When other information in a document containing audited financial statements is materially inconsistent with information appearing in the financial statements the auditor must ______. a. ensure the financial statements included with the other information are marked "Unaudited" b. disclaim an opinion of the financial statements c. include an explanatory paragraph in the audit report

c. include an explanatory paragraph in the audit report