Topic 15 - Multiple Choice
Under PCAOB standards, auditors will be required to identify and disclose at least one Critical Audit Matter (CAM) for each audit engagement as part of the standard audit report. a. true b. false
Answer: False Although the PCAOB expects that most audit engagements will involve one or more CAMs, the standards recognize that each engagement may not contain a CAM. In those cases, the report would include a statment saying that the auditor determined that there are no critical audit matters.
A qualified opinion is the opinion the auditor issues when he or she believes the financial statements are fairly stated in accordance with GAAP. a. true b. false
Answer: False An unqualified opinion indicates that the financial statements are fairly stated in accordance with GAAP. A qualified opinion, sometimes referred to as an "except for" opinion indicates some problems with concluding the financial statements are fairly stated.
Critical Audit Matters (CAMs) are defined as those matters that are critical for the auditor to know about before beginning the audit. a. true b. false
Answer: False Critical Audit Matters (CAM's) are those matters that are (1) material to the financial statements, (2) especially challenging, subjective, or involving complex judgment by the auditor, and (3) that are communicated or required to be communicated to the audit committee of the board of directors. These are matters that the auditor *identifies during the course of the audit, not necessarily before the engagement begins.*
Reviews of financial statements include inquiries, analytical procedures, and a small amount of substantive testing of transactions. a. true b. false
Answer: False Substantive testing of transactions are not performed during a review of financial statements.
The auditor's report on a review of financial statements provides positive assurance regarding the fair presentation of the financial statements. a. true b. false
Answer: False The auditor's report for a review of financial statements provides negative assurance, not positive assurance.
Under AICPA auditing standards, the introductory paragraph of the auditor's report is never modified when the auditor issues a modified opinion. a. true b. false
Answer: False The introductory paragraph is modified when the auditor issues a disclaimer of opinion, but not for the other modifications.
An auditor discovers that a *disclosure that is required* under GAAP *has not been made* in the financial statements. According to AICPA standards, he or she should use an emphasis of a matter paragraph to draw attention to that disclosure. a. true b. false
Answer: False This is false. The auditor uses emphasis of matter paragraphs to draw attention to matters that are properly disclosed in the financial statements. If a disclosure that is required under GAAP is not included in the financial statements, the auditor should modify his or her audit opinion, including an explanatory paragraph prior to the opinion paragraph, but does not add an emphasis of matter paragraph.
Both AICPA and PCAOB auditing standards require the auditor to state in the auditor's report the length of tenure of the auditor/client relationship. a. true b. false
Answer: False This requirement is a PCAOB, but not an AICPA, requirement.
An audit report that is reissued from a prior year is typically used when the same auditor has been auditing the financial statements consecutively for multiple years. a. true b. false
Answer: False This statement is false. A reissued audit report is typically used when a different auditor audited the financial statements of a previous period. (usually you get their permission) if you can't get their permission you put in a disclosure that they did not want to give you permission.
When issuing a modified opinion under AICPA auditing standards, the auditor adds an explanatory paragraph AFTER the opinion paragraph in the audit report. a. true b. false
Answer: False This statement is false. The auditor adds the explanatory paragraph BEFORE the opinion paragraph when issuing a modified opinion under AICPA auditing standards.
If a previous auditor does not want his or her audit report from a prior period to be included in the current year filing, the auditor should re-audit the prior year financial statements and present the findings of their audit in the current year audit report. a. true b. false
Answer: False This statement is false. The auditor should instead include an other matter paragraph in the current period audit report indicating that other auditors audited the prior period financial statements.
When the auditor signs the audit report in the United States, he or she signs his or her own name. a. true b. false
Answer: False This statement is false. The auditor signs the name of the firm he or she works for.
If an engaged audit firm uses other audit firms that provide less than 5% of the total audit work performed, the identity of those other audit firms must be disclosed to the public in the Form AP. a. true b. false
Answer: False This statement is false. The identify of "other audit firms" that perform 5% or more of the audit work must be disclosed in the Form AP, but a *simple count* of "other audit firms" (i.e., no list of the firms' names) that provide less than 5% of the audit work is required.
When providing negative assurance, the auditor states an opinion regarding the subject matter she evaluated. a. true b. false
Answer: False This statement is false. When providing negative assurance, the auditor does not provide an opinion, but rather states whether or not anything significant came to his or her attention during the course of the evaluation.
When an auditor concludes that the financial statements are fairly stated in accordance with GAAP, he or she would issue a disclaimer of opinion. a. true b. false
Answer: False When the auditor concludes that the financial statements are presented fairly in accordance with GAAP, he or she would issue an unqualified opinion.
The following language was taken from an auditor's report on financial statements: "In our opinion, *except for* the possible effects of the matter described in the previous paragraph, *the financial statements referred to above present fairly, in all material respects*, the financial position of ABC Company as of December 31, 20X1" This is an example of which type of audit opinion? a. Disclaimer of opinion b. Adverse opinion c. Unmodified opinion d. Qualified opinion
Answer: Qualified opinion This is an example of a qualified opinion.
Emphasis of matter paragraphs and other matter paragraphs are both included in the auditor's report *after* the opinion paragraph. a. true b. false
Answer: True This statement is true.
In addition to referencing its independence in the title of the standard audit report (i.e., "Report of Independent Registered Public Accounting Firm"), the PCAOB 's standards require that the auditor explicitly acknowledge the requirement to be indepedent of the company under audit in the Basis for Opinion section of the report. a. true b. false
Answer: True This statement is true.
The auditor must explicitly state in their report whether or not they believe they have sufficient and appropriate audit evidence to provide a basis for their opinion under AICPA standards. a. true b. false
Answer: True This statement is true.
The auditor should indicate which auditing standards were followed in conducting the audit in the auditor's responsibility paragraph of the audit report issued under AICPA standards. a. true b. false
Answer: True This statement is true.
The opinion paragraph should indicate the financial reporting framework used by the client in preparing the financial statements. a. true b. false
Answer: True This statement is true.
The financial statements of HBM Co. have been audited by the same auditor for the past 5 years. In the 2013 filing, HBM presents three years worth of financial statements for comparative purposes. The auditor's report included in the 2013 filing should refer to their audits of all three years, not just their audit of the 2013 financial statements. a. true b. false
Answer: True This statement is true. An audit report must accompany the financial statements of all years presented in the filing.
When issuing a modified opinion under PCAOB auditing standards, the modification is acknowledged in the opening paragraph (i.e., Opinion Paragraph) of the audit report with an additional explanatory paragraph being included after the opinion paragraph. a. true b. false
Answer: True This statement is true. However, for audit reports issued under AICPA standards, the explanatory paragraphs detailing the modification appear before the opinion paragraph.
An auditor has audited a client's financial statements for 5 consecutive years. The client presents 3 years worth of financial statements in the filing for comparative purposes. For the 2012 audit, the auditor expressed a qualified opinion due to a scope limitation on confirmation of receivables. In the 2013 audit, the auditor issued an unqualified opinion on the 2013 financial statements. When presenting the audit report for comparative financial statements (2011-2013), the auditor can change his or her opinion on the 2012 audit of financial statement to be an unqualified opinion if he or she desires. a. true b. false
Answer: True This statement is true. If the auditor has obtained adequate evidence regarding the receivables balance for 2012 (such as through subsequent collections during 2012) he or she can change their previous audit opinion from qualified to unqualified. This is called updating the audit report.
For audits of public companies, the auditor's report is typically addressed to the board of directors and stockholders of the company--not to management. a. true b. false
Answer: True This statement is true. Since the board (the stockholder's representatives) and stockholders hire the auditor, the report is addressed to them.
Which of the following audit opinions would most likely be issued if the financial statements are materially misstated, and the misstatements are pervasive? a. Adverse b. Qualified c. Disclaimer d. Unqualified
Answer: a. Adverse The most likely opinion is an adverse opinion. Since the misstatements are pervasive, the auditor would have a difficult time qualifying the opinion.
The following language was taken from the auditor's report on financial statements: "In our opinion, *because of the significance* of the matter discussed in the previous paragraph, the consolidated financial statements referred to above *do not present fairly the financial position* of ABC Company and its subsidiaries as of December 31, 20X1" This is an example of which type of audit opinion? a. Adverse opinion b. Qualified opinion c. Unmodified opinion d. Disclaimer of opinion
Answer: a. Adverse opinion This is an example of an adverse opinion.
The following language was taken from an auditor's report on financial statements: "As discussed in Note X to the financial statements, the Company is a defendant in a lawsuit [briefly describe the nature of the litigation consistent with the Company's description in the note to the financial statements]. *Our opinion is not modified with respect to this matter*. " This is an example of which type of paragraph? a. Emphasis of matter paragraph b. Other matter paragraph
Answer: a. Emphasis of matter paragraph This is an example of an emphasis of matter paragraph. Hint: Must indicate that opinion is not modified for emphasis of matter paragraphs
The following language was taken from an auditor's report on financial statements: "In our report dated March 1, 20X1, we expressed an opinion that the 20X0 financial statements did not fairly present the financial position, results of operations, and cash flows of ABC Company in accordance with accounting principles generally accepted in the United States of America because of two departures from such principles: (1) ABC Company carried its property, plant, and equipment at appraisal values, and provided for depreciation on the basis of such values, and (2) ABC Company did not provide for deferred income taxes with respect to differences between income for financial reporting purposes and taxable income. As described in Note X, *the Company has changed its method of accounting* for these items and *restated its 20X0 financial statements to conform with accounting principles generally accepted* in the United States of America. Accordingly, *our present opinion on the restated 20X0 financial statements, as presented herein, is *different* from that expressed in our previous report*." This is an example of which type of paragraph? a. Other matter b. Emphasis of matter
Answer: a. Other matter This is an example of an other matter paragraph. This paragraph is an effort to help users understand why the auditor's opinion for the 20X0 financial statements changed from last period (when they originally reported on the 20X0 financial statements) to the current period. While they refer to a disclosure in the financial statements, the focus of this paragraph is not on that disclosure. Hint: Basically information disclosed in 20x0 is *different*, because they are financial statement focused. Other information from Note X does not deal with financial statement items specifically.
The following language was taken from an auditor's report on a client's financial statements: "The Company's financial statements do not disclose [describe the nature of the omitted information that is not practicable to present in the auditor's report]. In our opinion, disclosure of this information is required by accounting principles generally accepted in the United States of America. In our opinion, except for the omission of the information described in the previous paragraph, the financial statements referred to above present fairly, in all material respects, the financial position of ABC Company as of December 31, 20X1 and 20X0." This is an example of which type of audit opinion? a. Qualified opinion due to GAAP violation b. Adverse opinion c. Disclaimer of opinion d. Unmodified opinion e. Qualified opinion due to scope limitation
Answer: a. Qualified opinion due to GAAP violation This is a qualified opinion that is due to a GAAP violation. Inadequate disclosure, where those disclosures are required by GAAP, would lead the auditor to modify the audit opinion.
Which of the following audit opinions would most likely be issued if the financial statements are materially misstated, and the misstatements are pervasive? a. Qualified b. Adverse c. Unqualified d. Disclaimer
Answer: b. Adverse The most likely opinion is an adverse opinion. Since the misstatements are pervasive, the auditor would have a difficult time qualifying the opinion.
Which of the following types of audit opinions would most likely be issued when the auditor is unable to obtain adequate audit evidence regarding several material account balances? a. Unqualified b. Disclaimer c. Adverse d. Qualified
Answer: b. Disclaimer Since the problem is pervasive and material, the auditor would most likely disclaim an opinion. Since he or she cannot obtain adequate evidence on several material accounts, the auditor would not be able to come to a conclusion and therefore would disclaim an opinion.
For audits of publicly-traded companies in the United States, where is the name of the lead engagement partner required to be disclosed? a. In the Wall Street Journal b. In the PCAOB's Form AP c. In the SEC's Form DEF-14A d. In the Standard Audit Report
Answer: b. In the PCAOB's Form AP In the United States, the lead engagement partner's name is disclosed in the PCAOB's Form AP. In other disclosures (e.g., the Standard Audit Report), the firm name is disclosed without a requirement to identify the lead engagement partner.
Which of the following audit opinions would most likely be issued if the financial statements are materially misstated due to a misstatement in one particular account balance? a. Unqualified b. Adverse c. Qualified d. Disclaimer
Answer: c. Qualified Since the misstatement relates to one particular account balance, the auditor would most likely issue a qualified opinion.
In their audit report for which of the following engagements would the auditor provide negative assurance? a. Audit of financial statements b. Audit of internal controls c. Review of financial statements d. None of the above, the auditor provides positive assurance in each of the above cases
Answer: c. Review of financial statements The auditor provides negative assurance in their report on a review of financial statements.
During a review of financial statements, the auditor would NOT perform which of the following audit procedures? a. Inquiries b. Analytical procedures c. Substantive tests of transactions d. The auditor would perform each of the audit procedures listed above
Answer: c. Substantive tests of transactions The auditor would not perform substantive tests of transactions during a review of financial statements.
The following language was taken from an auditor's report on a client's financial statements: "We have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion. Accordingly, we do not express an opinion on these financial statements." This is an example of which type of audit opinion? a. Adverse opinion b. Qualified opinion c. Unmodified opinion d. Disclaimer of opinion
Answer: d. Disclaimer of opinion This is wording from a disclaimer of opinion. Notice that no opinion is given by the auditor. In all of the other options, the auditor offers an opinion on the financial statements.
Which of the following types of audit opinions would most likely be issued when the auditor is unable to obtain adequate audit evidence regarding one material account balance? a. Disclaimer b. Unqualified c. Adverse d. Qualified
Answer: d. Qualified A qualified opinion is most likely here. Since the lack of evidence relates to only one account balance, the auditor would likely qualify his or her opinion rather than disclaim an opinion.
The auditor specifies the time period covered by the auditor's report in which paragraph of the standard unmodified audit report issued under AICPA standards? a. Audit report date b. Management's Responsibility for the Financial Statements paragraph c. Auditor's Responsibility paragraph d. Report on the Financial Statements
Answer: d. Report on the Financial Statements The time period covered by the audit is indicated in the Report on the Financial Statements paragraph, which is the introductory paragraph of the auditor's report. The audit report date is typically the date the auditor completed the audit.
Which of the following audit opinions would most likely be issued if the financial statements contain an *immaterial misstatement*? a. Qualified b. Adverse c. Disclaimer d. Unqualified
Answer: d. Unqualified Because the auditor's opinion focuses on the fair presentation of the financial statements "in all material respects," the presence of an immaterial misstatement would not be likely to influence the auditor's opinion. As such, an unqualified opinion would most likely be issued.
Which of the following audit opinions would most likely be issued if the financial statements contain an *immaterial* misstatement? a. Qualified b. Adverse c. Disclaimer d. Unqualified
Answer: d. Unqualified If the auditor encounters a scope limitation (i.e., unable to obtain sufficient appropriate audit evidence) for an account that is not material, the auditor's opinion (which relates to material matters) is not likely to be changed. Thus, the most likely opinion would be the standard unqualified opinion.
Assuming the audited financial statements are presented fairly - in all material respects - and are in accordance with GAAP, which of the following audit opinions is most likely to be issued? a. Adverse b. Qualified c. Disclaimer d. Unqualified
Answer: d. Unqualified The unqualified opinion is the standard, desired audit opinion for financial statements that are presented fairly and are in accordance with GAAP.
The following language was taken from an auditor's report on a client's financial statements: "The Company's financial statements do not disclose [describe the nature of the omitted information that is not practicable to present in the auditor's report]. In our opinion, disclosure of this information is required to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion (all other matters in the audit are okay except for the limitation of scope in the audit process.) In our opinion, except for the omission of the information described in the previous paragraph, the financial statements referred to above present fairly, in all material respects, the financial position of ABC Company as of December 31, 20X1 and 20X0." This is an example of which type of audit opinion? a. Disclaimer of opinion b. Qualified opinion due to GAAP violation c. Adverse opinion d. Unmodified opinion e. Qualified opinion due to scope limitation
e. Qualified opinion due to scope limitation