Chap 018

Chapter 18 - Reports on Audited Financial Statements
Chapter 18 Reports on Audited Financial Statements

True / False Questions
1. A going concern issue requires a modification of the wording to the three-paragraph standard unqualified audit report (public compan !. "rue False
#. An opinion based in part on the report of another auditor requires an e$planator %emphasisof-matter paragraph be added to the standard unqualified%unmodified audit report. "rue False
&. A basic assumption that underlies financial reporting is that an entit will continue as a going concern. "rue False
'. A change in accounting estimate is an e$ample of an accounting change that affects comparabilit and requires an e$planator %emphasis-of-matter paragraph in the audit report. "rue False
(. A change in reporting entit is an e$ample of an accounting change that affects comparabilit and requires an e$planator %emphasis-of-matter paragraph in the audit report. "rue False
). Changes that do not affect consistenc are normall disclosed in the footnotes but do not require an e$planator %emphasis-of-matter paragraph in the audit report. "rue False
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*. An auditor ma be unable to e$press an unqualified opinion if an immaterial departure from +AA, is present in the financial statements. "rue False
8. An auditor must disclaim an opinion when the auditor lac-s independence. "rue False
.. "he choice of which audit report to issue depends on the condition and the materialit of an departure. "rue False
1/. A scope limitation results from an obtain sufficient appropriate e0idence about some component of the financial statements. "rue False
Multiple Choice Questions
11. 1hich of the following parties is responsible for the fairness of the representations made in financial statements2 A. Client3s management. 4. 5ndependent auditor. C. Audit committee. 6. A5C,A.
1#. 1hich of the following situations will not result in modification of the auditor3s report because of a scope limitation2 A. Restriction imposed b the client. 4. Reliance placed on the report of another auditor. C. 5nabilit to obtain sufficient appropriate e0idential matter. 6. 5nadequac in the accounting records.
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1&. 1hen the audited financial statements of the prior ear are presented together with those of the current ear7 the continuing auditor3s report should co0er A. 4oth ears. 4. 8nl the current ear. C. 8nl the current ear7 but the prior ear3s report should be presented. 6. 8nl the current ear7 but the prior ear3s report should be referred to.
1'. 9anagement belie0es and the auditor is satisfied7 that a material loss probabl will occur when pending litigation is resol0ed. 9anagement is unable to ma-e a reasonable estimate of the amount or range of the potential loss7 but full discloses the situation in the notes to the financial statements. 5f the auditor wishes to call attention to the matter and management does not ma-e an accrual in the financial statements7 the auditor should issue a(an! A. :ualified report due to a scope limitation. 4. :ualified report due to a departure from +AA,. C. ;nqualified%unmodified report with an e$planator %emphasis-of-matter paragraph. 6. ;nqualified%unmodified report in a standard auditor3s report.
1(. For which of the following e0ents would an auditor issue a report that does not include an reference to consistenc 2 A. A change in the method of accounting for in0entories. 4. A change from an accounting principle that is not generall accepted to one that is generall accepted. C. A change in the ser0ice life used to calculate depreciation e$pense. 6. A change in accounting principle without reasonable <ustification from management.
1). 5f the auditor belie0es that there is minimal li-elihood that resolution of an uncertaint will ha0e a material effect on the financial statements7 the auditor would issue a(n! A. =>$cept for= opinion. 4. Ad0erse opinion. C. ;nqualified%unmodified opinion. 6. 6isclaimer of opinion.
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1*. 1hen comparati0e financial statements are presented7 the fourth standard of reporting7 which refers to financial statements =ta-en as a whole7= should be considered to appl to the financial statements of the A. ,eriods presented plus the one preceding period. 4. Current period onl . C. Current period and those of the other periods presented. 6. Current and immediatel preceding period onl .
18. A predecessor auditor should complete the following before reissuing a report on statements presented on a comparati0e basis? A. Read the financial statements of the current period. 4. Read the financial statements of the past fi0e ears. C. 8btain a letter of representations from the current- ear7 successor auditor. 6. 4oth a and c.
1.. 5n connection with the e$amination of the consolidated financial statements of 9ott 5ndustries7 Fra@ier7 C,A7 plans to refer to another C,A3s e$amination of the financial statements of a subsidiar compan . ;nder these circumstances7 Fra@ier3s report must disclose A. "he name of the other C,A and the t pe of report issued b the other C,A. 4. "he portion of the financial statements e$amined b the other C,A. C. "he nature of Fra@ier3s re0iew of the other C,A3s wor-. 6. 5n a footnote the portions of the financial statements that were co0ered b the e$aminations of both auditors.
#/. 5f the principal auditor decides to ma-e reference to the other auditor3s e$amination7 the introductor paragraph must specificall indicate the A. "he portion of the financial statements e$amined b the other auditor. 4. Aame of the other auditor. C. Aame of the consolidated subsidiar e$amined b the other auditor. 6. " pe of opinion e$pressed b the other auditor.
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#1. 1hen a question arises about an entit 3s continued e$istence7 the auditor should consider factors tending to mitigate the significance of negati0e information concerning the entit 3s means for maintaining adequate cash flow. An e$ample of such a factor is the A. ,ossibilit of purchasing certain assets rather than leasing them. 4. Capabilit of e$tending the due dates of e$isting debt. C. Appropriateness of changing depreciation methods from double declining balance to straight line. 6. 9ar-etabilit of propert and equipment that management plans to -eep.
##. "he ad0erse effects of e0ents causing an auditor to belie0e there is substantial doubt about an entit 3s abilit to continue as a going concern would most li-el be mitigated b e0idence relating to the A. Abilit to e$pand operations into new product lines in the future. 4. Feasibilit of plans to purchase leased equipment at less than mar-et 0alue. C. 9ar-etabilit of assets that management plans to sell. 6. Committed arrangements to con0ert preferred stoc- to long-term debt.
#&. 1hich of the following auditing procedures most li-el would assist an auditor in identif ing conditions and e0ents that ma indicate substantial doubt about an entit 3s abilit to continue as a going concern2 A. 5nspecting title documents to 0erif whether an assets are pledged as collateral. 4. Confirming with third parties the details of arrangements to maintain financial support. C. Reconciling the cash balance per boo-s with the cut-off ban- statement and the banconfirmation. 6. Comparing the entit 3s depreciation and asset capitali@ation policies to other entities in the industr .
#'. 1hich of the following would be considered a change that affects consistenc 2 A. Change in accounting estimate. 4. Change in accounting principle. C. Change in classification and reclassification. 6. All of the abo0e.
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#(. 1hich of the following conditions or e0ents most li-el would cause an auditor to ha0e substantial doubt about an entit 3s abilit to continue as a going concern2 A. Cash flows from operating acti0ities are negati0e. 4. Research and de0elopment pro<ects are postponed. C. Significant related part transactions are per0asi0e. 6. Stoc- di0idends replace annual cash di0idends.
#). 1hich of the following conditions or e0ents most li-el would cause an auditor to ha0e substantial doubt about an entit 3s abilit to continue as a going concern2 A. Significant related part transactions are per0asi0e. 4. ;sual trade credit from suppliers is denied. C. Arrearages in preferred stoc- di0idends are paid. 6. Restrictions on the disposal of principal assets are present.
#*. An auditor was unable to obtain audited financial statements or other e0idence supporting an entit 3s in0estment in a large foreign subsidiar . 4etween which of the following reports should the auditor choose2 A. Ad0erse and unqualified%unmodified with an e$planator %emphasis-of-matter paragraph added. 4. 6isclaimer and unqualified%unmodified with an e$planator %emphasis-of-matter paragraph added. C. :ualified and ad0erse. 6. :ualified and disclaimer.
#8. An auditor includes a separate paragraph in an otherwise unmodified report to emphasi@e that the entit being reported on had significant transactions with related parties. "he inclusion of this separate paragraph A. 5s considered an =e$cept for= qualification of the opinion. 4. Biolates generall accepted auditing standards if this information is alread disclosed in footnotes to the financial statements. C. Aecessitates a re0ision of the opinion paragraph to include the phrase =with the foregoing e$planation.= 6. 5s appropriate and would not negate the unqualified%unmodified opinion.
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#.. 1hen the auditor is unable to determine the amounts associated with the illegal acts of client personnel because of an inabilit to obtain adequate e0idence7 the auditor should issue a(n! A. =Sub<ect to= qualified opinion. 4. 6isclaimer of opinion. C. Ad0erse opinion. 6. ;nqualified%unmodified opinion with a separate e$planator %emphasis-of-matter paragraph.
&/. 1hich of the following circumstances normall does not affect the consistenc phrase in the auditor3s standard report2 A. A change in accounting estimate. 4. A change in accounting principle. C. A change in the companies included in combined financial statements. 6. A correction of an error in principle.
&1. 1hich of the following circumstances should be recogni@ed as a consistenc modification in the auditor3s report7 whether or not the item is full disclosed in the financial statements2 A. A change in accounting estimate. 4. A change from an unacceptable accounting principle to a generall accepted one. C. Correction of an error not in0ol0ing a change in accounting principle. 6. A change in classification.
&#. 1hen the client fails to include information that is necessar for the fair presentation of financial statements in the bod of the statements or in the related footnotes7 it is the responsibilit of the auditor to present the information7 if practicable7 in the auditor3s report and e$press a(n! A. :ualified opinion or a disclaimer of opinion. 4. :ualified opinion or an ad0erse opinion. C. Ad0erse opinion or a disclaimer of opinion. 6. :ualified opinion or an unqualified opinion.
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&&. 1hen an auditor e$presses an ad0erse opinion7 the opinion paragraph should include A. "he principal effects of the departure from generall accepted accounting principles. 4. A direct reference to a separate paragraph disclosing the basis for the opinion. C. "he substanti0e reasons for the financial statements being misleading. 6. A description of the uncertaint or scope limitation that pre0ents an unqualified opinion.
&'. An auditor would issue an ad0erse opinion if A. "he audit was begun b other independent auditors who withdrew from the engagement. 4. A qualified opinion cannot be gi0en because the auditor lac-s independence. C. A restriction on the scope of the audit was significant. 6. "he statements ta-en as a whole do not fairl present the financial condition and results of operations of the compan .
&(. 8ther bases of accounting (special purpose framewor-s! include all of the following e$cept? A. "a$ basis. 4. Aon-+AA, methods used for internal reporting. C. Cash basis. 6. Regulator basis.
&). An auditor is reporting on cash basis financial statements. "hese statements are best referred to in his or her report b which one of the following descriptions2 A. Financial position and results of operations arising from cash transactions. 4. Assets and liabilities arising from cash transactions and re0enue collected and e$penses paid. C. 4alance sheet and income statement resulting from cash transactions. 6. Cash balance sheet and the source and application of funds.
&*. An accountant has been engaged to report on an entit 3s internal controls without performing an audit of the financial statements. 1hat restrictions7 if an 7 should the accountant place on the use of this report2 A. "his report should be restricted for use b management. 4. "his report should be restricted for use b the audit committee. C. "his report should be restricted for use b a specified regulator agenc . 6. "he accountant does not need to place an restrictions on the use of this report.
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&8. 1hich of the following would be considered a change that does not affect consistenc 2 A. Change e$pected to ha0e a material future effect. 4. Change in accounting principle. C. Correction of an error in principle. 6. Aone of the abo0e are considered changes that do not affect consistenc .
&.. Abbot7 C,A7 as principal auditor for consolidated financial statements7 is using a qualified report of another auditor. Abbot does not consider the qualification material relati0e to the consolidated financial statements and Abbot is willing to accept responsibilit for the wor- of the other auditor. 1hat recognition7 if an 7 must Abbot ma-e in his report to the report of the other audit2 A. Ce need ma-e no reference. 4. Ce must refer to the qualification of the other auditor and qualif his report li-ewise. C. Ce must include the other auditor3s report with his report but need not qualif his report. 6. Ce must include the other auditor3s report with his report and gi0e an e$planation of its significance.
'/. "he predecessor auditor7 after properl communicating with the successor auditor7 has reissued a report because the audit client desires comparati0e financial statements. "he predecessor auditor3s report should ma-e A. Ao reference to the report or the wor- of the successor auditor. 4. Reference to the wor- of the successor auditor in the scope paragraph. C. Reference to both the wor- and the report of the successor auditor in the opinion paragraph. 6. Reference to the report of the successor auditor in the scope paragraph.
'1. 5n the auditor3s report7 the principal auditor decides not to ma-e reference to another C,A who audited a client3s subsidiar . "he principal auditor could <ustif this decision if7 among other requirements7 the principal auditor A. 5ssues an unqualified%unmodified opinion on the consolidated financial statements. 4. Dearns that the other C,A issued an unqualified%unmodified opinion on the subsidiar 3s financial statements. C. 5s unable to re0iew the other C,A3s audit programs and wor-ing papers. 6. 5s satisfied as to the other C,A3s independence and professional reputation.
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'#. An auditor concludes that there is substantial doubt about an entit 3s abilit to continue as a going concern for a reasonable period of time. 5f the entit 3s financial statements adequatel disclose its financial difficulties7 the auditor3s report is required to include an e$planator %emphasis-of-matter paragraph that specificall uses the phrase(s! A. =Reasonable period of time7 not to e$ceed one ear= and =going concern.= 4. =Reasonable period of time7 not to e$ceed one ear= but not =going concern.= C. =+oing concern= but not =reasonable period of time7 not to e$ceed one ear.= 6. Aeither =going concern= nor =reasonable period of time7 not to e$ceed one ear.=
'&. Comparati0e financial statements include the financial statements of a prior period that were e$amined b a predecessor auditor whose report is not presented. 5f the predecessor auditor3s report was qualified7 the successor auditor must A. 8btain written appro0al from the predecessor auditor to include the prior ear3s financial statements. 4. 5ssue a standard comparati0e audit report indicating the di0ision of responsibilit . C. >$press an opinion on the current ear statements alone and ma-e no reference to the prior ear statements. 6. 6isclose the reasons for an qualification in the predecessor auditor3s opinion.
''. 1hen an auditor concludes there is substantial doubt about an entit 3s abilit to continue as a going concern for a reasonable period of time7 the auditor3s responsibilit is to A. ,repare prospecti0e financial information to 0erif whether management3s plans can be effecti0el implemented. 4. ,ro<ect future conditions and e0ents for a period of time not to e$ceed one ear following the date of the financial statements. C. 5ssue a qualified or ad0erse opinion7 depending upon materialit 7 because of the possible effects on the financial statements. 6. Consider the adequac of disclosure about the entit 3s possible inabilit to continue as a going concern.
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'(. 5f a public compan issues financial statements that purport to present its financial position and results of operations but omits the statement of cash flows7 the auditor ordinaril will e$press a(an! A. 6isclaimer of opinion. 4. :ualified opinion. C. Re0iew report. 6. ;nqualified opinion with a separate e$planator paragraph.
'). Auditing standards define special purpose financial statements as including those prepared under the following base(s! A. Regulator basis. 4. "a$ basis. C. Contractual basis. 6. All of the abo0e.
'*. 1hen reporting on comparati0e financial statements where the financial statements of the prior ear ha0e been e$amined b a predecessor auditor whose report is not presented7 the successor auditor should ma-e A. Ao reference to the predecessor auditor. 4. Reference to the predecessor auditor onl if the predecessor auditor e$pressed a qualified opinion. C. Reference to the predecessor auditor onl if the predecessor auditor e$pressed an unqualified%unmodified opinion. 6. Reference to the predecessor auditor regardless of the t pe of opinion e$pressed b the predecessor auditor.
'8. 1hich of the following would not require an e$planator %emphasis-of-matter paragraph in the auditor3s report2 A. Additional emphasis. 4. Dac- of consistenc in the financial statements due to accounting changes. C. +oing concern. 6. 8pinion based in part on the report of another auditor.
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'.. 1hen are an auditor3s reporting responsibilities not met b attaching an e$planation of the circumstances and a disclaimer of opinion to the client3s financial statement2 A. 1hen the auditor belie0es the financial statements are misleading. 4. 1hen the auditor was unable to obser0e the ta-ing of the ph sical in0entor . C. 1hen the auditor is uncertain about the outcome of a material uncertaint . 6. 1hen the auditor has performed insufficient auditing procedures to e$press an opinion.
(/. A C,A who is not independent and is associated with financial statements should disclaim an opinion with respect to those financial statements. "he disclaimer should A. Clearl state the specific reasons for lac- of independence. 4. Aot mention an reason for the disclaimer other than that the C,A was unable to conduct the e$amination in accordance with generall accepted auditing standards. C. Aot describe the reason for lac- of independence but should state specificall that the C,A is not independent. 6. 5nclude a middle paragraph clearl describing the C,A3s association with the client and e$plaining wh the C,A was unable to gather sufficient appropriate e0idential matter to warrant the e$pression of an opinion.
(1. An auditor ma reasonabl issue an =e$cept for= qualified opinion for A. A scope limitation or an un<ustified accounting change. 4. A scope limitation7 but not an un<ustified accounting change. C. An un<ustified accounting change7 but not a scope limitation. 6. Aeither an un<ustified accounting change nor a scope limitation.
(#. "he auditor3s best course of action with respect to =other financial information= included in an annual report containing the auditor3s report is to A. 5ndicate in the auditor3s report that the =other financial information= is unaudited. 4. Consider whether the =other financial information= is accurate b performing a limited re0iew. C. 8btain written representations from management as to the material accurac of the =other financial information.= 6. Read and consider the manner of presentation of the =other financial information.=
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(&. 1hen audited financial statements are presented in a document containing other information7 the auditor A. Cas an obligation to perform auditing procedures to corroborate the other information. 4. 5s required to issue an =e$cept for= qualified opinion if the other information has a material misstatement of fact. C. Should read the other information to consider whether it is inconsistent with the audited financial statements. 6. Cas no responsibilit for the other information because it is not part of the basic financial statements.
('. 1hen audited financial statements are presented in a client3s document containing other information7 the auditor should A. ,erform inquir and anal tical procedures to ascertain whether the other information is reasonable. 4. Add an e$planator paragraph to the auditor3s report without changing the opinion on the financial statements. C. ,erform the appropriate substanti0e auditing procedures to corroborate the other information. 6. Read the other information to determine that it is consistent with the audited financial statements.
((. 1hat is an auditor3s responsibilit for supplementar information7 such as segment information7 that is outside the basic financial statements7 but required b the FAS42 A. "he auditor has no responsibilit for required supplementar information as long as it is outside the basic financial statements. 4. "he auditor3s onl responsibilit for required supplementar information is to assist in preparing the supplementar information. C. "he auditor should appl certain limited procedures to the required supplementar information and report deficiencies in or omissions of7 such information. 6. "he auditor should appl tests of details of transactions and balances to the required supplementar information and report an material misstatements in such information.
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(). All of the following are true with respect to the auditor3s consideration of information other than the audited financial statements that are included in a client3s annual report e$cept? A. "he auditor is under no obligation to perform audit procedures on this other information. 4. "he auditor must consider whether the other information is consistent with the information contained in the audited financial statements. C. "he auditor must request that material inconsistencies be corrected. 6. "he auditor must perform audit procedures on this other information.
(*. 1hen an auditor reports on financial statements prepared on an entit 3s income ta$ basis7 the auditor3s report should A. 4e titled so that the financial statements are not confused with statements prepared to conform to generall accepted accounting principles. 4. 6isclaim an opinion on whether the statements were e$amined in accordance with generall accepted auditing standards. C. Aot e$press an opinion on whether the statements are presented in conformit with the basis of accounting used. 6. 5nclude an e$planation of how the results of operations differ from the cash receipts and disbursements basis of accounting.
(8. An auditor3s report on financial statements prepared in accordance with a basis of accounting other than generall accepted accounting principles should include all of the following e$cept? A. An opinion as to whether the basis of accounting used is appropriate under the circumstances. 4. An opinion as to whether the financial statements are presented fairl in conformit with the other basis of accounting. C. Reference to the note to the financial statements that describes the basis of presentation. 6. A statement that the basis of presentation is a basis of accounting other than generall accepted accounting principles.
(.. 1hich of the generall accepted auditing standards of reporting would not normall appl to special reports such as cash basis statements2 A. First standard. 4. Second standard. C. "hird standard. 6. Fourth standard.
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)/. An engagement to e$press an opinion on a s stem of internal control will generall A. 8nl require those procedures alread applied in assessing control ris- during a financial statement audit. 4. 5ncrease the reliabilit of the financial statements that ha0e alread been audited. C. 4e more e$tensi0e in scope than the assessment of control ris- made during a financial statement audit. 6. 4e more limited in scope than the assessment of control ris- made during a financial statement audit.
)1. 1hen e$pressing an opinion on a specified account or item in the financial statements7 the auditor need onl consider that account or item. Cowe0er7 the auditor must ha0e audited the entire set of financial statements if this engagement requires a report on the entit 3s A. Aet income. 4. Retained earnings. C. Assets. 6. 1or-ing capital.
)#. A special report related to compliance with contractual pro0isions pro0ides A. ,ositi0e assurance. 4. Aegati0e assurance. C. Ao assurance. 6. Aone of the abo0e.
)&. An auditor concludes that there is a material inconsistenc in the other information in an annual report to shareholders containing audited financial statements. 5f the auditor concludes that the financial statements do not require re0ision7 but the client refuses to re0ise or eliminate the material inconsistenc 7 the auditor ma A. 5ssue an =e$cept for= qualified opinion after discussing the matter with the client3s board of directors. 4. Consider the matter closed since the other information is not in the audited financial statements. C. 6isclaim an opinion on the financial statements after e$plaining the material inconsistenc in a separate e$planator %emphasis-of-matter paragraph. 6. Re0ise the auditor3s report to include a separate e$planator %emphasis-of- matter paragraph describing the material inconsistenc .
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)'. Cra0ens was as-ed to perform the first audit of a wholesale business that does not maintain perpetual in0entor records. Cra0ens has obser0ed the current in0entor but has not obser0ed the ph sical in0entor at the pre0ious ear-end date and concludes that the opening in0entor balance7 which is not auditable7 is a material factor in the determination of cost of goods sold for the current ear. Cra0ens will probabl A. 6ecline the engagement. 4. >$press an unqualified%unmodified opinion on the balance sheet and income statement e$cept for in0entor . C. 5ssue a disclaimer of opinion. 6. 5ssue an ad0erse opinion.
)(. 1hen there has been a change in accounting principle that materiall affects the comparabilit of the comparati0e financial statements presented for a public compan and the auditor concurs with the change7 the auditor should
A. A. 4. 4. C. C. 6. 6.
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)). 5n the first audit of a client7 because of the client3s record retention policies7 an auditor was not able to gather sufficient e0idence about the consistent application of accounting principles between the current and the prior ear7 as well as the amounts of assets or liabilities at the beginning of the current ear. 5f the amounts in question could materiall affect current operating results7 the auditor would A. 4e unable to e$press an opinion on the current ear3s results of operations and cash flows. 4. >$press a qualified opinion on the financial statements because of a client-imposed scope limitation. C. 1ithdraw from the engagement and refuse to be associated with the financial statements. 6. Specificall state that the financial statements are not comparable to the prior ear because of an uncertaint .
)*. A scope limitation sufficient to preclude an unqualified opinion always will result when management A. ,re0ents the auditor from re0iewing the wor-ing papers of the predecessor auditor. 4. >ngages the auditor after the ear-end ph sical in0entor is completed. C. Requests that certain material accounts recei0able not be confirmed. 6. Refuses to pro0ide a representation letter ac-nowledging its responsibilit for the fair presentation of the financial statements in conformit with +AA,.
)8. 5n which of the following situations would an auditor ordinaril choose between e$pressing an =e$cept for= qualified opinion and e$pressing an ad0erse opinion2 A. "he auditor did not obser0e the entit 3s ph sical in0entor and is unable to become satisfied as to its balance b other auditing procedures. 4. "he financial statements fail to disclose information that is required b generall accepted accounting principles. C. "he auditor is as-ed to report onl on the entit 3s balance sheet and not on the other basic financial statements. 6. >0ents disclosed in the financial statements cause the auditor to ha0e substantial doubt about the entit 3s abilit to continue as a going concern.
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).. 5n an engagement to e$press an opinion on one or more specified elements7 accounts7 or items of a financial statement7 the auditor can generall audit onl those specified elements and not the entire set of financial statements. Cowe0er7 the auditor is required to audit the entire set of financial statements if the elements specified include A. Aet 5ncome. 4. Stoc-holders3 >quit . C. 4oth A E 4. 6. Aone of the abo0e.
Short Answer Questions
*/. Feff Fohns is a staff accountant and has been assigned to the audit of 1orldwide >nterprises7 5nc. Subsequent to the completion of fieldwor-7 Feff was assigned to draft the audit report. "he content of one of the paragraphs he has drafted reads as follows? As e$plained in Aote # to the financial statements7 1orldwide >nterprises has charged goodwill and certain other intangible assets acquired in two separate acquisitions directl to shareholders3 equit . ;nder generall accepted accounting principles7 these intangibles should ha0e been recorded as assets and amorti@ed to income o0er future periods. Cad these intangibles been capitali@ed7 total assets would ha0e increased b G'//7/// as of 6ecember &17 #/11 and net income and earnings per share would be increased b G&8/7/// and G#.#(7 respecti0el (assuming a #/- ear amorti@ation period!. a. 4ased on the contents of the paragraph abo0e7 which condition requiring a departure from a standard unqualified%unmodified opinion e$ists in the engagement2 b. Assuming that the engagement partner agrees with the paragraph Feff has prepared abo0e7 where in the auditor3s report should the paragraph be placed2 c. Cow would the materialit of the condition abo0e affect the final choice of opinion2
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*1. "he following four situations require a modification to the standard unqualified%unmodified audit report. 5dentif the modification required for each. a. 8pinion based in part on the report of another auditor. b. +oing concern. c. Dac- of consistenc . d. Additional emphasis.
*#. Changes in a client3s accounting choices either affect =consistenc = in the application of +AA, or the do not. For each item listed below7 state whether the item affects consistenc and identif the effect the change will ha0e on the audit report. 1. Change in accounting estimate. #. Correction of an error in principle. &. Change in reporting entit . '. Correction of an error that does not in0ol0e an accounting principle. (. Change in accounting principle. ). Change in classification and reclassification. *. Change e$pected to ha0e a material future effect.
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*&. For each of the following situations7 indicate what t pe of audit report is most appropriate. a. "he auditor lac-s independence in fact7 but not necessaril in appearance. b. "here is a scope limitation and it is material but the o0erall financial statements are still presented fairl . c. "he uncorrected misstatements are immaterial. d. "here is a departure from +AA, and it is per0asi0el material.
*'. 5dentif the special purpose framewor- used in each of the following situations. 1. A real estate compan reports to its partners on the basis used to complete the income ta$ return. #. A compan has its financial statements prepared on a price-le0el ad<usted basis as required b its lender. &. An insurance compan reports in compliance with the rules of a state insurance commission. '. A partnership reports on re0enues recei0ed and e$penses paid. 1hat modifications must be made to the standard auditor3s report for these situations2
*(. 6iscuss the conditions that prohibit the auditor from issuing an unqualified%unmodified opinion and the t pes of reports that the auditor ma issue for a financial statement audit.
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Chapter 18 Reports on Audited Financial Statements Answer He
True / False Questions
1. A going concern issue requires a modification of the wording to the three-paragraph standard unqualified audit report (public compan !. TRUE
AACSB: Communication AICPA BB: Industry AICPA FN: Reporting Blooms: Remember Difficulty: !asy "earning #b$ecti%e: &'() *now t+e situations t+at result in t+e addition of e,planatory language to t+e standard un-ualified audit report. /opic: !,planatory "anguage Added to t+e Standard 0n-ualified10nmodified Audit Report
#. An opinion based in part on the report of another auditor requires an e$planator %emphasisof-matter paragraph be added to the standard unqualified%unmodified audit report. FALSE
&. A basic assumption that underlies financial reporting is that an entit will continue as a going concern. TRUE
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'. A change in accounting estimate is an e$ample of an accounting change that affects comparabilit and requires an e$planator %emphasis-of-matter paragraph in the audit report. FALSE
(. A change in reporting entit is an e$ample of an accounting change that affects comparabilit and requires an e$planator %emphasis-of-matter paragraph in the audit report. TRUE
). Changes that do not affect consistenc are normall disclosed in the footnotes but do not require an e$planator %emphasis-of-matter paragraph in the audit report. TRUE
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*. An auditor ma be unable to e$press an unqualified opinion if an immaterial departure from +AA, is present in the financial statements. FALSE
AACSB: Communication AICPA BB: Industry AICPA FN: Reporting Blooms: Remember Difficulty: !asy "earning #b$ecti%e: &'(2 Be able to e,plain t+e conditions t+at lead to a departure from t+e standard un-ualified1unmodified audit report. /opic: Conditions for Departure
8. An auditor must disclaim an opinion when the auditor lac-s independence. TRUE
.. "he choice of which audit report to issue depends on the condition and the materialit of an departure. TRUE
AACSB: Communication AICPA BB: Industry AICPA FN: Reporting Blooms: Remember Difficulty: !asy "earning #b$ecti%e: &'(3 *now t+e types of financial statement audit reports ot+er t+an un-ualified1unmodified. /opic: /ypes of Financial Statement Audit Reports #t+er t+an 0n-ualified10nmodified
18-#&
1/. A scope limitation results from an inabilit to obtain sufficient appropriate e0idence about some component of the financial statements. TRUE
Multiple Choice Questions
11. 1hich of the following parties is responsible for the fairness of the representations made in financial statements2 A Client3s management. 4. 5ndependent auditor. C. Audit committee. 6. A5C,A.
AACSB: Communication AICPA BB: Industry AICPA FN: Reporting Blooms: Remember Difficulty: !asy "earning #b$ecti%e: &'( 0nderstand t+e %arious components of t+e standard un-ualified financial statement audit report. /opic: Reporting on t+e Financial Statement Audit: /+e Standard 0n-ualified10nmodified Audit Report
18-#'
1#. 1hich of the following situations will not result in modification of the auditor3s report because of a scope limitation2 A. Restriction imposed b the client. ! Reliance placed on the report of another auditor. C. 5nabilit to obtain sufficient appropriate e0idential matter. 6. 5nadequac in the accounting records.
AACSB: Communication AICPA BB: Critical /+in4ing AICPA FN: Reporting Blooms: Remember Difficulty: !asy "earning #b$ecti%e: &'() *now t+e situations t+at result in t+e addition of e,planatory language to t+e standard un-ualified audit report. "earning #b$ecti%e: &'(3 *now t+e types of financial statement audit reports ot+er t+an un-ualified1unmodified. /opic: !,planatory "anguage Added to t+e Standard 0n-ualified10nmodified Audit Report /opic: /ypes of Financial Statement Audit Reports #t+er t+an 0n-ualified10nmodified
1&. 1hen the audited financial statements of the prior ear are presented together with those of the current ear7 the continuing auditor3s report should co0er A 4oth ears. 4. 8nl the current ear. C. 8nl the current ear7 but the prior ear3s report should be presented. 6. 8nl the current ear7 but the prior ear3s report should be referred to.
AACSB: Communication AICPA BB: Critical /+in4ing AICPA FN: Reporting Blooms: Remember Difficulty: !asy "earning #b$ecti%e: &'( 0nderstand t+e %arious components of t+e standard un-ualified financial statement audit report. "earning #b$ecti%e: &'() *now t+e situations t+at result in t+e addition of e,planatory language to t+e standard un-ualified audit report. "earning #b$ecti%e: &'(5 0nderstand t+e situations t+at may cause different types of reports on comparati%e financial statements. /opic: !,planatory "anguage Added to t+e Standard 0n-ualified10nmodified Audit Report /opic: Reporting on t+e Financial Statement Audit: /+e Standard 0n-ualified10nmodified Audit Report /opic: Reports on Comparati%e Financial Statements
18-#(
1'. 9anagement belie0es and the auditor is satisfied7 that a material loss probabl will occur when pending litigation is resol0ed. 9anagement is unable to ma-e a reasonable estimate of the amount or range of the potential loss7 but full discloses the situation in the notes to the financial statements. 5f the auditor wishes to call attention to the matter and management does not ma-e an accrual in the financial statements7 the auditor should issue a(an! A. :ualified report due to a scope limitation. 4. :ualified report due to a departure from +AA,. C ;nqualified%unmodified report with an e$planator %emphasis-of-matter paragraph. 6. ;nqualified%unmodified report in a standard auditor3s report.
AACSB: Communication AICPA BB: Critical /+in4ing AICPA FN: Reporting Blooms: Apply Difficulty: !asy "earning #b$ecti%e: &'( 0nderstand t+e %arious components of t+e standard un-ualified financial statement audit report. "earning #b$ecti%e: &'() *now t+e situations t+at result in t+e addition of e,planatory language to t+e standard un-ualified audit report. "earning #b$ecti%e: &'(2 Be able to e,plain t+e conditions t+at lead to a departure from t+e standard un-ualified1unmodified audit report. "earning #b$ecti%e: &'(3 *now t+e types of financial statement audit reports ot+er t+an un-ualified1unmodified. /opic: Conditions for Departure /opic: !,planatory "anguage Added to t+e Standard 0n-ualified10nmodified Audit Report /opic: Reporting on t+e Financial Statement Audit: /+e Standard 0n-ualified10nmodified Audit Report /opic: /ypes of Financial Statement Audit Reports #t+er t+an 0n-ualified10nmodified
1(. For which of the following e0ents would an auditor issue a report that does not include an reference to consistenc 2 A. A change in the method of accounting for in0entories. 4. A change from an accounting principle that is not generall accepted to one that is generall accepted. C A change in the ser0ice life used to calculate depreciation e$pense. 6. A change in accounting principle without reasonable <ustification from management.
AACSB: Communication AICPA BB: Critical /+in4ing AICPA FN: Reporting Blooms: Apply Difficulty: !asy "earning #b$ecti%e: &'( 0nderstand t+e %arious components of t+e standard un-ualified financial statement audit report. "earning #b$ecti%e: &'() *now t+e situations t+at result in t+e addition of e,planatory language to t+e standard un-ualified audit report. "earning #b$ecti%e: &'(5 0nderstand t+e situations t+at may cause different types of reports on comparati%e financial statements. /opic: !,planatory "anguage Added to t+e Standard 0n-ualified10nmodified Audit Report /opic: Reporting on t+e Financial Statement Audit: /+e Standard 0n-ualified10nmodified Audit Report /opic: Reports on Comparati%e Financial Statements
18-#)
1). 5f the auditor belie0es that there is minimal li-elihood that resolution of an uncertaint will ha0e a material effect on the financial statements7 the auditor would issue a(n! A. =>$cept for= opinion. 4. Ad0erse opinion. C ;nqualified%unmodified opinion. 6. 6isclaimer of opinion.
AACSB: Communication AICPA BB: Critical /+in4ing AICPA FN: Reporting Blooms: Apply Difficulty: !asy "earning #b$ecti%e: &'( 0nderstand t+e %arious components of t+e standard un-ualified financial statement audit report. "earning #b$ecti%e: &'(2 Be able to e,plain t+e conditions t+at lead to a departure from t+e standard un-ualified1unmodified audit report. "earning #b$ecti%e: &'(3 *now t+e types of financial statement audit reports ot+er t+an un-ualified1unmodified. "earning #b$ecti%e: &'(6 Be able to e,plain t+e effect of materiality on t+e auditor7s c+oice of audit reports. /opic: Conditions for Departure /opic: Reporting on t+e Financial Statement Audit: /+e Standard 0n-ualified10nmodified Audit Report /opic: /+e !ffect of 8ateriality on Financial Statement Reporting /opic: /ypes of Financial Statement Audit Reports #t+er t+an 0n-ualified10nmodified
1*. 1hen comparati0e financial statements are presented7 the fourth standard of reporting7 which refers to financial statements =ta-en as a whole7= should be considered to appl to the financial statements of the A. ,eriods presented plus the one preceding period. 4. Current period onl . C Current period and those of the other periods presented. 6. Current and immediatel preceding period onl .
AACSB: Communication AICPA BB: Critical /+in4ing AICPA FN: Reporting Blooms: 0nderstand Difficulty: !asy "earning #b$ecti%e: &'( 0nderstand t+e %arious components of t+e standard un-ualified financial statement audit report. "earning #b$ecti%e: &'(5 0nderstand t+e situations t+at may cause different types of reports on comparati%e financial statements. /opic: Reporting on t+e Financial Statement Audit: /+e Standard 0n-ualified10nmodified Audit Report /opic: Reports on Comparati%e Financial Statements
18-#*
18. A predecessor auditor should complete the following before reissuing a report on statements presented on a comparati0e basis? A. Read the financial statements of the current period. 4. Read the financial statements of the past fi0e ears. C. 8btain a letter of representations from the current- ear7 successor auditor. " 4oth a and c.
AACSB: Communication AICPA BB: Critical /+in4ing AICPA FN: Reporting Blooms: Apply Difficulty: !asy "earning #b$ecti%e: &'(5 0nderstand t+e situations t+at may cause different types of reports on comparati%e financial statements. /opic: Reports on Comparati%e Financial Statements
1.. 5n connection with the e$amination of the consolidated financial statements of 9ott 5ndustries7 Fra@ier7 C,A7 plans to refer to another C,A3s e$amination of the financial statements of a subsidiar compan . ;nder these circumstances7 Fra@ier3s report must disclose A. "he name of the other C,A and the t pe of report issued b the other C,A. ! "he portion of the financial statements e$amined b the other C,A. C. "he nature of Fra@ier3s re0iew of the other C,A3s wor-. 6. 5n a footnote the portions of the financial statements that were co0ered b the e$aminations of both auditors.
AACSB: Communication AICPA BB: Industry AICPA FN: Reporting Blooms: Apply Difficulty: !asy "earning #b$ecti%e: &'() *now t+e situations t+at result in t+e addition of e,planatory language to t+e standard un-ualified audit report. /opic: !,planatory "anguage Added to t+e Standard 0n-ualified10nmodified Audit Report
18-#8
#/. 5f the principal auditor decides to ma-e reference to the other auditor3s e$amination7 the introductor paragraph must specificall indicate the A "he portion of the financial statements e$amined b the other auditor. 4. Aame of the other auditor. C. Aame of the consolidated subsidiar e$amined b the other auditor. 6. " pe of opinion e$pressed b the other auditor.
AACSB: Communication AICPA BB: Critical /+in4ing AICPA FN: Reporting Blooms: Apply Difficulty: !asy "earning #b$ecti%e: &'() *now t+e situations t+at result in t+e addition of e,planatory language to t+e standard un-ualified audit report. /opic: !,planatory "anguage Added to t+e Standard 0n-ualified10nmodified Audit Report
#1. 1hen a question arises about an entit 3s continued e$istence7 the auditor should consider factors tending to mitigate the significance of negati0e information concerning the entit 3s means for maintaining adequate cash flow. An e$ample of such a factor is the A. ,ossibilit of purchasing certain assets rather than leasing them. ! Capabilit of e$tending the due dates of e$isting debt. C. Appropriateness of changing depreciation methods from double declining balance to straight line. 6. 9ar-etabilit of propert and equipment that management plans to -eep.
AACSB: Communication AICPA BB: Critical /+in4ing AICPA FN: Decision 8a4ing Blooms: Analy9e Difficulty: !asy "earning #b$ecti%e: &'() *now t+e situations t+at result in t+e addition of e,planatory language to t+e standard un-ualified audit report. /opic: !,planatory "anguage Added to t+e Standard 0n-ualified10nmodified Audit Report
18-#.
##. "he ad0erse effects of e0ents causing an auditor to belie0e there is substantial doubt about an entit 3s abilit to continue as a going concern would most li-el be mitigated b e0idence relating to the A. Abilit to e$pand operations into new product lines in the future. 4. Feasibilit of plans to purchase leased equipment at less than mar-et 0alue. C 9ar-etabilit of assets that management plans to sell. 6. Committed arrangements to con0ert preferred stoc- to long-term debt.
AACSB: Communication AICPA BB: Critical /+in4ing AICPA FN: 8easurement Blooms: Apply Difficulty: !asy "earning #b$ecti%e: &'() *now t+e situations t+at result in t+e addition of e,planatory language to t+e standard un-ualified audit report. /opic: !,planatory "anguage Added to t+e Standard 0n-ualified10nmodified Audit Report
#&. 1hich of the following auditing procedures most li-el would assist an auditor in identif ing conditions and e0ents that ma indicate substantial doubt about an entit 3s abilit to continue as a going concern2 A. 5nspecting title documents to 0erif whether an assets are pledged as collateral. ! Confirming with third parties the details of arrangements to maintain financial support. C. Reconciling the cash balance per boo-s with the cut-off ban- statement and the banconfirmation. 6. Comparing the entit 3s depreciation and asset capitali@ation policies to other entities in the industr .
AACSB: Communication AICPA BB: Critical /+in4ing AICPA FN: 8easurement Blooms: Analy9e Difficulty: !asy "earning #b$ecti%e: &'() *now t+e situations t+at result in t+e addition of e,planatory language to t+e standard un-ualified audit report. /opic: !,planatory "anguage Added to t+e Standard 0n-ualified10nmodified Audit Report
18-&/
#'. 1hich of the following would be considered a change that affects consistenc 2 A. Change in accounting estimate. ! Change in accounting principle. C. Change in classification and reclassification. 6. All of the abo0e.
AACSB: Communication AICPA BB: Critical /+in4ing AICPA FN: Reporting Blooms: Remember Difficulty: !asy "earning #b$ecti%e: &'() *now t+e situations t+at result in t+e addition of e,planatory language to t+e standard un-ualified audit report. /opic: !,planatory "anguage Added to t+e Standard 0n-ualified10nmodified Audit Report
#(. 1hich of the following conditions or e0ents most li-el would cause an auditor to ha0e substantial doubt about an entit 3s abilit to continue as a going concern2 A Cash flows from operating acti0ities are negati0e. 4. Research and de0elopment pro<ects are postponed. C. Significant related part transactions are per0asi0e. 6. Stoc- di0idends replace annual cash di0idends.
AACSB: Communication AICPA BB: Critical /+in4ing AICPA FN: Decision 8a4ing Blooms: Apply Difficulty: !asy "earning #b$ecti%e: &'() *now t+e situations t+at result in t+e addition of e,planatory language to t+e standard un-ualified audit report. /opic: !,planatory "anguage Added to t+e Standard 0n-ualified10nmodified Audit Report
#). 1hich of the following conditions or e0ents most li-el would cause an auditor to ha0e substantial doubt about an entit 3s abilit to continue as a going concern2 A. Significant related part transactions are per0asi0e. ! ;sual trade credit from suppliers is denied. C. Arrearages in preferred stoc- di0idends are paid. 6. Restrictions on the disposal of principal assets are present.
AACSB: Communication AICPA BB: Critical /+in4ing AICPA FN: Decision 8a4ing Blooms: Apply Difficulty: !asy "earning #b$ecti%e: &'() *now t+e situations t+at result in t+e addition of e,planatory language to t+e standard un-ualified audit report. /opic: !,planatory "anguage Added to t+e Standard 0n-ualified10nmodified Audit Report
18-&1
#*. An auditor was unable to obtain audited financial statements or other e0idence supporting an entit 3s in0estment in a large foreign subsidiar . 4etween which of the following reports should the auditor choose2 A. Ad0erse and unqualified%unmodified with an e$planator %emphasis-of-matter paragraph added. 4. 6isclaimer and unqualified%unmodified with an e$planator %emphasis-of-matter paragraph added. C. :ualified and ad0erse. " :ualified and disclaimer.
AACSB: Communication AICPA BB: Critical /+in4ing AICPA FN: Reporting Blooms: Remember Difficulty: !asy "earning #b$ecti%e: &'() *now t+e situations t+at result in t+e addition of e,planatory language to t+e standard un-ualified audit report. "earning #b$ecti%e: &'(2 Be able to e,plain t+e conditions t+at lead to a departure from t+e standard un-ualified1unmodified audit report. "earning #b$ecti%e: &'(3 *now t+e types of financial statement audit reports ot+er t+an un-ualified1unmodified. "earning #b$ecti%e: &'(6 Be able to e,plain t+e effect of materiality on t+e auditor7s c+oice of audit reports. /opic: Conditions for Departure /opic: !,planatory "anguage Added to t+e Standard 0n-ualified10nmodified Audit Report /opic: /+e !ffect of 8ateriality on Financial Statement Reporting /opic: /ypes of Financial Statement Audit Reports #t+er t+an 0n-ualified10nmodified
#8. An auditor includes a separate paragraph in an otherwise unmodified report to emphasi@e that the entit being reported on had significant transactions with related parties. "he inclusion of this separate paragraph A. 5s considered an =e$cept for= qualification of the opinion. 4. Biolates generall accepted auditing standards if this information is alread disclosed in footnotes to the financial statements. C. Aecessitates a re0ision of the opinion paragraph to include the phrase =with the foregoing e$planation.= " 5s appropriate and would not negate the unqualified%unmodified opinion.
AACSB: Communication AICPA BB: Critical /+in4ing AICPA FN: Reporting Blooms: Apply Difficulty: !asy "earning #b$ecti%e: &'() *now t+e situations t+at result in t+e addition of e,planatory language to t+e standard un-ualified audit report. /opic: !,planatory "anguage Added to t+e Standard 0n-ualified10nmodified Audit Report
18-&#
#.. 1hen the auditor is unable to determine the amounts associated with the illegal acts of client personnel because of an inabilit to obtain adequate e0idence7 the auditor should issue a(n! A. =Sub<ect to= qualified opinion. ! 6isclaimer of opinion. C. Ad0erse opinion. 6. ;nqualified%unmodified opinion with a separate e$planator %emphasis-of-matter paragraph.
AACSB: Communication AICPA BB: "egal AICPA FN: Reporting Blooms: Apply Difficulty: !asy "earning #b$ecti%e: &'() *now t+e situations t+at result in t+e addition of e,planatory language to t+e standard un-ualified audit report. "earning #b$ecti%e: &'(3 *now t+e types of financial statement audit reports ot+er t+an un-ualified1unmodified. "earning #b$ecti%e: &'(6 Be able to e,plain t+e effect of materiality on t+e auditor7s c+oice of audit reports. /opic: !,planatory "anguage Added to t+e Standard 0n-ualified10nmodified Audit Report /opic: /+e !ffect of 8ateriality on Financial Statement Reporting /opic: /ypes of Financial Statement Audit Reports #t+er t+an 0n-ualified10nmodified
&/. 1hich of the following circumstances normall does not affect the consistenc phrase in the auditor3s standard report2 A A change in accounting estimate. 4. A change in accounting principle. C. A change in the companies included in combined financial statements. 6. A correction of an error in principle.
AACSB: Communication AICPA BB: Critical /+in4ing AICPA FN: Reporting Blooms: Remember Difficulty: !asy "earning #b$ecti%e: &'() *now t+e situations t+at result in t+e addition of e,planatory language to t+e standard un-ualified audit report. "earning #b$ecti%e: &'(5 0nderstand t+e situations t+at may cause different types of reports on comparati%e financial statements. /opic: !,planatory "anguage Added to t+e Standard 0n-ualified10nmodified Audit Report /opic: Reports on Comparati%e Financial Statements
18-&&
&1. 1hich of the following circumstances should be recogni@ed as a consistenc modification in the auditor3s report7 whether or not the item is full disclosed in the financial statements2 A. A change in accounting estimate. ! A change from an unacceptable accounting principle to a generall accepted one. C. Correction of an error not in0ol0ing a change in accounting principle. 6. A change in classification.
AACSB: Communication AICPA BB: "egal AICPA FN: Reporting Blooms: Remember Difficulty: !asy "earning #b$ecti%e: &'() *now t+e situations t+at result in t+e addition of e,planatory language to t+e standard un-ualified audit report. "earning #b$ecti%e: &'(5 0nderstand t+e situations t+at may cause different types of reports on comparati%e financial statements. /opic: !,planatory "anguage Added to t+e Standard 0n-ualified10nmodified Audit Report /opic: Reports on Comparati%e Financial Statements
&#. 1hen the client fails to include information that is necessar for the fair presentation of financial statements in the bod of the statements or in the related footnotes7 it is the responsibilit of the auditor to present the information7 if practicable7 in the auditor3s report and e$press a(n! A. :ualified opinion or a disclaimer of opinion. ! :ualified opinion or an ad0erse opinion. C. Ad0erse opinion or a disclaimer of opinion. 6. :ualified opinion or an unqualified opinion.
AACSB: Communication AICPA BB: "egal AICPA FN: Reporting Blooms: Apply Difficulty: !asy "earning #b$ecti%e: &'(2 Be able to e,plain t+e conditions t+at lead to a departure from t+e standard un-ualified1unmodified audit report. "earning #b$ecti%e: &'(3 *now t+e types of financial statement audit reports ot+er t+an un-ualified1unmodified. /opic: Conditions for Departure /opic: /ypes of Financial Statement Audit Reports #t+er t+an 0n-ualified10nmodified
18-&'
&&. 1hen an auditor e$presses an ad0erse opinion7 the opinion paragraph should include A. "he principal effects of the departure from generall accepted accounting principles. ! A direct reference to a separate paragraph disclosing the basis for the opinion. C. "he substanti0e reasons for the financial statements being misleading. 6. A description of the uncertaint or scope limitation that pre0ents an unqualified opinion.
AACSB: Communication AICPA BB: Critical /+in4ing AICPA FN: Reporting Blooms: Remember Difficulty: !asy "earning #b$ecti%e: &'(2 Be able to e,plain t+e conditions t+at lead to a departure from t+e standard un-ualified1unmodified audit report. "earning #b$ecti%e: &'(3 *now t+e types of financial statement audit reports ot+er t+an un-ualified1unmodified. "earning #b$ecti%e: &'(6 Be able to e,plain t+e effect of materiality on t+e auditor7s c+oice of audit reports. /opic: Conditions for Departure /opic: /+e !ffect of 8ateriality on Financial Statement Reporting /opic: /ypes of Financial Statement Audit Reports #t+er t+an 0n-ualified10nmodified
&'. An auditor would issue an ad0erse opinion if A. "he audit was begun b other independent auditors who withdrew from the engagement. 4. A qualified opinion cannot be gi0en because the auditor lac-s independence. C. A restriction on the scope of the audit was significant. " "he statements ta-en as a whole do not fairl present the financial condition and results of operations of the compan .
AACSB: Communication AICPA BB: Critical /+in4ing AICPA FN: Reporting Blooms: Apply Difficulty: !asy "earning #b$ecti%e: &'(2 Be able to e,plain t+e conditions t+at lead to a departure from t+e standard un-ualified1unmodified audit report. "earning #b$ecti%e: &'(3 *now t+e types of financial statement audit reports ot+er t+an un-ualified1unmodified. /opic: Conditions for Departure /opic: /ypes of Financial Statement Audit Reports #t+er t+an 0n-ualified10nmodified
18-&(
&(. 8ther bases of accounting (special purpose framewor-s! include all of the following e$cept? A. "a$ basis. ! Aon-+AA, methods used for internal reporting. C. Cash basis. 6. Regulator basis.
AACSB: Communication AICPA BB: Industry AICPA FN: 8easurement Blooms: Remember Difficulty: !asy "earning #b$ecti%e: &'(& 0nderstand t+e auditor7s reporting responsibility for financial statements prepared on a basis ot+er t+an :AAP. /opic: Financial Statement Prepared According to a Special Purpose Framewor4
&). An auditor is reporting on cash basis financial statements. "hese statements are best referred to in his or her report b which one of the following descriptions2 A. Financial position and results of operations arising from cash transactions. ! Assets and liabilities arising from cash transactions and re0enue collected and e$penses paid. C. 4alance sheet and income statement resulting from cash transactions. 6. Cash balance sheet and the source and application of funds.
AACSB: Communication AICPA BB: Critical /+in4ing AICPA FN: Reporting Blooms: Remember Difficulty: !asy "earning #b$ecti%e: &'(& 0nderstand t+e auditor7s reporting responsibility for financial statements prepared on a basis ot+er t+an :AAP. /opic: Financial Statement Prepared According to a Special Purpose Framewor4
18-&)
&*. An accountant has been engaged to report on an entit 3s internal controls without performing an audit of the financial statements. 1hat restrictions7 if an 7 should the accountant place on the use of this report2 A. "his report should be restricted for use b management. 4. "his report should be restricted for use b the audit committee. C. "his report should be restricted for use b a specified regulator agenc . " "he accountant does not need to place an restrictions on the use of this report.
AACSB: Communication AICPA BB: "egal AICPA FN: Reporting Blooms: Apply Difficulty: !asy "earning #b$ecti%e: &'(; 0nderstand t+e auditor7s responsibility for reporting on specified elements< accounts< or items of a financial statement. /opic: Specified !lements= Accounts= or Items of a Financial Statement
&8. 1hich of the following would be considered a change that does not affect consistenc 2 A Change e$pected to ha0e a material future effect. 4. Change in accounting principle. C. Correction of an error in principle. 6. Aone of the abo0e are considered changes that do not affect consistenc .
AACSB: Communication AICPA BB: Critical /+in4ing AICPA FN: Reporting Blooms: Remember Difficulty: ) 8edium "earning #b$ecti%e: &'( 0nderstand t+e %arious components of t+e standard un-ualified financial statement audit report. "earning #b$ecti%e: &'() *now t+e situations t+at result in t+e addition of e,planatory language to t+e standard un-ualified audit report. /opic: !,planatory "anguage Added to t+e Standard 0n-ualified10nmodified Audit Report /opic: Reporting on t+e Financial Statement Audit: /+e Standard 0n-ualified10nmodified Audit Report
18-&*
&.. Abbot7 C,A7 as principal auditor for consolidated financial statements7 is using a qualified report of another auditor. Abbot does not consider the qualification material relati0e to the consolidated financial statements and Abbot is willing to accept responsibilit for the wor- of the other auditor. 1hat recognition7 if an 7 must Abbot ma-e in his report to the report of the other audit2 A Ce need ma-e no reference. 4. Ce must refer to the qualification of the other auditor and qualif his report li-ewise. C. Ce must include the other auditor3s report with his report but need not qualif his report. 6. Ce must include the other auditor3s report with his report and gi0e an e$planation of its significance.
AACSB: Communication AICPA BB: "egal AICPA FN: Reporting Blooms: Apply Difficulty: ) 8edium "earning #b$ecti%e: &'() *now t+e situations t+at result in t+e addition of e,planatory language to t+e standard un-ualified audit report. /opic: !,planatory "anguage Added to t+e Standard 0n-ualified10nmodified Audit Report
'/. "he predecessor auditor7 after properl communicating with the successor auditor7 has reissued a report because the audit client desires comparati0e financial statements. "he predecessor auditor3s report should ma-e A Ao reference to the report or the wor- of the successor auditor. 4. Reference to the wor- of the successor auditor in the scope paragraph. C. Reference to both the wor- and the report of the successor auditor in the opinion paragraph. 6. Reference to the report of the successor auditor in the scope paragraph.
AACSB: Communication AICPA BB: Critical /+in4ing AICPA FN: Reporting Blooms: Apply Difficulty: ) 8edium "earning #b$ecti%e: &'(5 0nderstand t+e situations t+at may cause different types of reports on comparati%e financial statements. /opic: Reports on Comparati%e Financial Statements
18-&8
'1. 5n the auditor3s report7 the principal auditor decides not to ma-e reference to another C,A who audited a client3s subsidiar . "he principal auditor could <ustif this decision if7 among other requirements7 the principal auditor A. 5ssues an unqualified%unmodified opinion on the consolidated financial statements. 4. Dearns that the other C,A issued an unqualified%unmodified opinion on the subsidiar 3s financial statements. C. 5s unable to re0iew the other C,A3s audit programs and wor-ing papers. " 5s satisfied as to the other C,A3s independence and professional reputation.
AACSB: Communication AICPA BB: Critical /+in4ing AICPA FN: Reporting Blooms: Apply Difficulty: ) 8edium "earning #b$ecti%e: &'() *now t+e situations t+at result in t+e addition of e,planatory language to t+e standard un-ualified audit report. /opic: !,planatory "anguage Added to t+e Standard 0n-ualified10nmodified Audit Report
'#. An auditor concludes that there is substantial doubt about an entit 3s abilit to continue as a going concern for a reasonable period of time. 5f the entit 3s financial statements adequatel disclose its financial difficulties7 the auditor3s report is required to include an e$planator %emphasis-of-matter paragraph that specificall uses the phrase(s! A. =Reasonable period of time7 not to e$ceed one ear= and =going concern.= 4. =Reasonable period of time7 not to e$ceed one ear= but not =going concern.= C =+oing concern= but not =reasonable period of time7 not to e$ceed one ear.= 6. Aeither =going concern= nor =reasonable period of time7 not to e$ceed one ear.=
AACSB: Communication AICPA BB: Critical /+in4ing AICPA FN: Reporting Blooms: Remember Difficulty: ) 8edium "earning #b$ecti%e: &'() *now t+e situations t+at result in t+e addition of e,planatory language to t+e standard un-ualified audit report. /opic: !,planatory "anguage Added to t+e Standard 0n-ualified10nmodified Audit Report
18-&.
'&. Comparati0e financial statements include the financial statements of a prior period that were e$amined b a predecessor auditor whose report is not presented. 5f the predecessor auditor3s report was qualified7 the successor auditor must A. 8btain written appro0al from the predecessor auditor to include the prior ear3s financial statements. 4. 5ssue a standard comparati0e audit report indicating the di0ision of responsibilit . C. >$press an opinion on the current ear statements alone and ma-e no reference to the prior ear statements. " 6isclose the reasons for an qualification in the predecessor auditor3s opinion.
AACSB: Communication AICPA BB: "egal AICPA FN: Reporting Blooms: Apply Difficulty: ) 8edium "earning #b$ecti%e: &'() *now t+e situations t+at result in t+e addition of e,planatory language to t+e standard un-ualified audit report. "earning #b$ecti%e: &'(2 Be able to e,plain t+e conditions t+at lead to a departure from t+e standard un-ualified1unmodified audit report. "earning #b$ecti%e: &'(5 0nderstand t+e situations t+at may cause different types of reports on comparati%e financial statements. /opic: Conditions for Departure /opic: !,planatory "anguage Added to t+e Standard 0n-ualified10nmodified Audit Report /opic: Reports on Comparati%e Financial Statements
''. 1hen an auditor concludes there is substantial doubt about an entit 3s abilit to continue as a going concern for a reasonable period of time7 the auditor3s responsibilit is to A. ,repare prospecti0e financial information to 0erif whether management3s plans can be effecti0el implemented. 4. ,ro<ect future conditions and e0ents for a period of time not to e$ceed one ear following the date of the financial statements. C. 5ssue a qualified or ad0erse opinion7 depending upon materialit 7 because of the possible effects on the financial statements. " Consider the adequac of disclosure about the entit 3s possible inabilit to continue as a going concern.
AACSB: Communication AICPA BB: Critical /+in4ing AICPA FN: Reporting Blooms: Apply Difficulty: ) 8edium "earning #b$ecti%e: &'() *now t+e situations t+at result in t+e addition of e,planatory language to t+e standard un-ualified audit report. "earning #b$ecti%e: &'(2 Be able to e,plain t+e conditions t+at lead to a departure from t+e standard un-ualified1unmodified audit report. /opic: Conditions for Departure /opic: !,planatory "anguage Added to t+e Standard 0n-ualified10nmodified Audit Report
18-'/
'(. 5f a public compan issues financial statements that purport to present its financial position and results of operations but omits the statement of cash flows7 the auditor ordinaril will e$press a(an! A. 6isclaimer of opinion. ! :ualified opinion. C. Re0iew report. 6. ;nqualified opinion with a separate e$planator paragraph.
AACSB: Communication AICPA BB: Industry AICPA FN: Reporting Blooms: Apply Difficulty: ) 8edium "earning #b$ecti%e: &'() *now t+e situations t+at result in t+e addition of e,planatory language to t+e standard un-ualified audit report. "earning #b$ecti%e: &'(2 Be able to e,plain t+e conditions t+at lead to a departure from t+e standard un-ualified1unmodified audit report. "earning #b$ecti%e: &'(3 *now t+e types of financial statement audit reports ot+er t+an un-ualified1unmodified. /opic: Conditions for Departure /opic: !,planatory "anguage Added to t+e Standard 0n-ualified10nmodified Audit Report /opic: /ypes of Financial Statement Audit Reports #t+er t+an 0n-ualified10nmodified
'). Auditing standards define special purpose financial statements as including those prepared under the following base(s! A. Regulator basis. 4. "a$ basis. C. Contractual basis. " All of the abo0e.
AACSB: Communication AICPA BB: Critical /+in4ing AICPA FN: Reporting Blooms: Remember Difficulty: ) 8edium "earning #b$ecti%e: &'(& 0nderstand t+e auditor7s reporting responsibility for financial statements prepared on a basis ot+er t+an :AAP. /opic: Financial Statement Prepared According to a Special Purpose Framewor4
18-'1
'*. 1hen reporting on comparati0e financial statements where the financial statements of the prior ear ha0e been e$amined b a predecessor auditor whose report is not presented7 the successor auditor should ma-e A. Ao reference to the predecessor auditor. 4. Reference to the predecessor auditor onl if the predecessor auditor e$pressed a qualified opinion. C. Reference to the predecessor auditor onl if the predecessor auditor e$pressed an unqualified%unmodified opinion. " Reference to the predecessor auditor regardless of the t pe of opinion e$pressed b the predecessor auditor.
AACSB: Communication AICPA BB: "egal AICPA FN: Reporting Blooms: Apply Difficulty: ) 8edium "earning #b$ecti%e: &'() *now t+e situations t+at result in t+e addition of e,planatory language to t+e standard un-ualified audit report. "earning #b$ecti%e: &'(5 0nderstand t+e situations t+at may cause different types of reports on comparati%e financial statements. /opic: !,planatory "anguage Added to t+e Standard 0n-ualified10nmodified Audit Report /opic: Reports on Comparati%e Financial Statements
'8. 1hich of the following would not require an e$planator %emphasis-of-matter paragraph in the auditor3s report2 A. Additional emphasis. 4. Dac- of consistenc in the financial statements due to accounting changes. C. +oing concern. " 8pinion based in part on the report of another auditor.
AACSB: Communication AICPA BB: "egal AICPA FN: Reporting Blooms: Remember Difficulty: ) 8edium "earning #b$ecti%e: &'() *now t+e situations t+at result in t+e addition of e,planatory language to t+e standard un-ualified audit report. /opic: !,planatory "anguage Added to t+e Standard 0n-ualified10nmodified Audit Report
18-'#
'.. 1hen are an auditor3s reporting responsibilities not met b attaching an e$planation of the circumstances and a disclaimer of opinion to the client3s financial statement2 A 1hen the auditor belie0es the financial statements are misleading. 4. 1hen the auditor was unable to obser0e the ta-ing of the ph sical in0entor . C. 1hen the auditor is uncertain about the outcome of a material uncertaint . 6. 1hen the auditor has performed insufficient auditing procedures to e$press an opinion.
AACSB: Communication AICPA BB: Critical /+in4ing AICPA FN: Reporting Blooms: Apply Difficulty: ) 8edium "earning #b$ecti%e: &'(2 Be able to e,plain t+e conditions t+at lead to a departure from t+e standard un-ualified1unmodified audit report. "earning #b$ecti%e: &'(3 *now t+e types of financial statement audit reports ot+er t+an un-ualified1unmodified. /opic: Conditions for Departure /opic: /ypes of Financial Statement Audit Reports #t+er t+an 0n-ualified10nmodified
(/. A C,A who is not independent and is associated with financial statements should disclaim an opinion with respect to those financial statements. "he disclaimer should A. Clearl state the specific reasons for lac- of independence. 4. Aot mention an reason for the disclaimer other than that the C,A was unable to conduct the e$amination in accordance with generall accepted auditing standards. C Aot describe the reason for lac- of independence but should state specificall that the C,A is not independent. 6. 5nclude a middle paragraph clearl describing the C,A3s association with the client and e$plaining wh the C,A was unable to gather sufficient appropriate e0idential matter to warrant the e$pression of an opinion.
AACSB: Communication AICPA BB: "egal AICPA FN: Reporting Blooms: Remember Difficulty: ) 8edium "earning #b$ecti%e: &'(2 Be able to e,plain t+e conditions t+at lead to a departure from t+e standard un-ualified1unmodified audit report. "earning #b$ecti%e: &'(3 *now t+e types of financial statement audit reports ot+er t+an un-ualified1unmodified. "earning #b$ecti%e: &'(6 Be able to e,plain t+e effect of materiality on t+e auditor7s c+oice of audit reports. /opic: Conditions for Departure /opic: /+e !ffect of 8ateriality on Financial Statement Reporting /opic: /ypes of Financial Statement Audit Reports #t+er t+an 0n-ualified10nmodified
18-'&
(1. An auditor ma reasonabl issue an =e$cept for= qualified opinion for A A scope limitation or an un<ustified accounting change. 4. A scope limitation7 but not an un<ustified accounting change. C. An un<ustified accounting change7 but not a scope limitation. 6. Aeither an un<ustified accounting change nor a scope limitation.
AACSB: Communication AICPA BB: Critical /+in4ing AICPA FN: Reporting Blooms: Apply Difficulty: ) 8edium "earning #b$ecti%e: &'(2 Be able to e,plain t+e conditions t+at lead to a departure from t+e standard un-ualified1unmodified audit report. "earning #b$ecti%e: &'(3 *now t+e types of financial statement audit reports ot+er t+an un-ualified1unmodified. /opic: Conditions for Departure /opic: /ypes of Financial Statement Audit Reports #t+er t+an 0n-ualified10nmodified
(#. "he auditor3s best course of action with respect to =other financial information= included in an annual report containing the auditor3s report is to A. 5ndicate in the auditor3s report that the =other financial information= is unaudited. 4. Consider whether the =other financial information= is accurate b performing a limited re0iew. C. 8btain written representations from management as to the material accurac of the =other financial information.= " Read and consider the manner of presentation of the =other financial information.=
AACSB: Communication AICPA BB: Critical /+in4ing AICPA FN: Reporting Blooms: Apply Difficulty: ) 8edium "earning #b$ecti%e: &'(> *now t+e auditor7s responsibility for ot+er information in documents containing audited financial statements. /opic: #t+er Information in Documents Containing Audited Financial Statements
18-''
(&. 1hen audited financial statements are presented in a document containing other information7 the auditor A. Cas an obligation to perform auditing procedures to corroborate the other information. 4. 5s required to issue an =e$cept for= qualified opinion if the other information has a material misstatement of fact. C Should read the other information to consider whether it is inconsistent with the audited financial statements. 6. Cas no responsibilit for the other information because it is not part of the basic financial statements.
('. 1hen audited financial statements are presented in a client3s document containing other information7 the auditor should A. ,erform inquir and anal tical procedures to ascertain whether the other information is reasonable. 4. Add an e$planator paragraph to the auditor3s report without changing the opinion on the financial statements. C. ,erform the appropriate substanti0e auditing procedures to corroborate the other information. " Read the other information to determine that it is consistent with the audited financial statements.
AACSB: Communication AICPA BB: Critical /+in4ing AICPA FN: Reporting Blooms: Apply Difficulty: ) 8edium "earning #b$ecti%e: &'() *now t+e situations t+at result in t+e addition of e,planatory language to t+e standard un-ualified audit report. "earning #b$ecti%e: &'(> *now t+e auditor7s responsibility for ot+er information in documents containing audited financial statements. /opic: !,planatory "anguage Added to t+e Standard 0n-ualified10nmodified Audit Report /opic: #t+er Information in Documents Containing Audited Financial Statements
18-'(
((. 1hat is an auditor3s responsibilit for supplementar information7 such as segment information7 that is outside the basic financial statements7 but required b the FAS42 A. "he auditor has no responsibilit for required supplementar information as long as it is outside the basic financial statements. 4. "he auditor3s onl responsibilit for required supplementar information is to assist in preparing the supplementar information. C "he auditor should appl certain limited procedures to the required supplementar information and report deficiencies in or omissions of7 such information. 6. "he auditor should appl tests of details of transactions and balances to the required supplementar information and report an material misstatements in such information.
AACSB: Communication AICPA BB: "egal AICPA FN: Reporting Blooms: Apply Difficulty: ) 8edium "earning #b$ecti%e: &'(> *now t+e auditor7s responsibility for ot+er information in documents containing audited financial statements. /opic: #t+er Information in Documents Containing Audited Financial Statements
(). All of the following are true with respect to the auditor3s consideration of information other than the audited financial statements that are included in a client3s annual report e$cept? A. "he auditor is under no obligation to perform audit procedures on this other information. 4. "he auditor must consider whether the other information is consistent with the information contained in the audited financial statements. C. "he auditor must request that material inconsistencies be corrected. " "he auditor must perform audit procedures on this other information.
18-')
(*. 1hen an auditor reports on financial statements prepared on an entit 3s income ta$ basis7 the auditor3s report should A 4e titled so that the financial statements are not confused with statements prepared to conform to generall accepted accounting principles. 4. 6isclaim an opinion on whether the statements were e$amined in accordance with generall accepted auditing standards. C. Aot e$press an opinion on whether the statements are presented in conformit with the basis of accounting used. 6. 5nclude an e$planation of how the results of operations differ from the cash receipts and disbursements basis of accounting.
AACSB: Communication AICPA BB: Critical /+in4ing AICPA FN: Reporting Blooms: Apply Difficulty: ) 8edium "earning #b$ecti%e: &'(& 0nderstand t+e auditor7s reporting responsibility for financial statements prepared on a basis ot+er t+an :AAP. /opic: Financial Statement Prepared According to a Special Purpose Framewor4
(8. An auditor3s report on financial statements prepared in accordance with a basis of accounting other than generall accepted accounting principles should include all of the following e$cept? A An opinion as to whether the basis of accounting used is appropriate under the circumstances. 4. An opinion as to whether the financial statements are presented fairl in conformit with the other basis of accounting. C. Reference to the note to the financial statements that describes the basis of presentation. 6. A statement that the basis of presentation is a basis of accounting other than generall accepted accounting principles.
AACSB: Communication AICPA BB: Critical /+in4ing AICPA FN: Reporting Blooms: Apply Difficulty: ) 8edium "earning #b$ecti%e: &'(& 0nderstand t+e auditor7s reporting responsibility for financial statements prepared on a basis ot+er t+an :AAP. /opic: Financial Statement Prepared According to a Special Purpose Framewor4
18-'*
(.. 1hich of the generall accepted auditing standards of reporting would not normall appl to special reports such as cash basis statements2 A First standard. 4. Second standard. C. "hird standard. 6. Fourth standard.
AACSB: Communication AICPA BB: "egal AICPA FN: Reporting Blooms: Remember Difficulty: ) 8edium "earning #b$ecti%e: &'(& 0nderstand t+e auditor7s reporting responsibility for financial statements prepared on a basis ot+er t+an :AAP. /opic: Financial Statement Prepared According to a Special Purpose Framewor4
)/. An engagement to e$press an opinion on a s stem of internal control will generall A. 8nl require those procedures alread applied in assessing control ris- during a financial statement audit. 4. 5ncrease the reliabilit of the financial statements that ha0e alread been audited. C 4e more e$tensi0e in scope than the assessment of control ris- made during a financial statement audit. 6. 4e more limited in scope than the assessment of control ris- made during a financial statement audit.
AACSB: Communication AICPA BB: Industry AICPA FN: Reporting Blooms: Analy9e Difficulty: ) 8edium "earning #b$ecti%e: &'(; 0nderstand t+e auditor7s responsibility for reporting on specified elements< accounts< or items of a financial statement. /opic: Specified !lements= Accounts= or Items of a Financial Statement
18-'8
)1. 1hen e$pressing an opinion on a specified account or item in the financial statements7 the auditor need onl consider that account or item. Cowe0er7 the auditor must ha0e audited the entire set of financial statements if this engagement requires a report on the entit 3s A Aet income. 4. Retained earnings. C. Assets. 6. 1or-ing capital.
AACSB: Communication AICPA BB: Critical /+in4ing AICPA FN: Reporting Blooms: Apply Difficulty: ) 8edium "earning #b$ecti%e: &'(; 0nderstand t+e auditor7s responsibility for reporting on specified elements< accounts< or items of a financial statement. /opic: Specified !lements= Accounts= or Items of a Financial Statement
)#. A special report related to compliance with contractual pro0isions pro0ides A. ,ositi0e assurance. ! Aegati0e assurance. C. Ao assurance. 6. Aone of the abo0e.
AACSB: Communication AICPA BB: Industry AICPA FN: 8easurement Blooms: Apply Difficulty: ) 8edium "earning #b$ecti%e: &' ( 0nderstand t+e auditor7s reporting responsibility for compliance wit+ contractual agreements or regulatory re-uirements related to financial statements. /opic: Compliance Reports Related to Audited Financial Statements
18-'.
)&. An auditor concludes that there is a material inconsistenc in the other information in an annual report to shareholders containing audited financial statements. 5f the auditor concludes that the financial statements do not require re0ision7 but the client refuses to re0ise or eliminate the material inconsistenc 7 the auditor ma A. 5ssue an =e$cept for= qualified opinion after discussing the matter with the client3s board of directors. 4. Consider the matter closed since the other information is not in the audited financial statements. C. 6isclaim an opinion on the financial statements after e$plaining the material inconsistenc in a separate e$planator %emphasis-of-matter paragraph. " Re0ise the auditor3s report to include a separate e$planator %emphasis-of- matter paragraph describing the material inconsistenc .
AACSB: Communication AICPA BB: Critical /+in4ing AICPA FN: Reporting Blooms: Apply Difficulty: 2 ?ard "earning #b$ecti%e: &'( 0nderstand t+e %arious components of t+e standard un-ualified financial statement audit report. "earning #b$ecti%e: &'() *now t+e situations t+at result in t+e addition of e,planatory language to t+e standard un-ualified audit report. "earning #b$ecti%e: &'(2 Be able to e,plain t+e conditions t+at lead to a departure from t+e standard un-ualified1unmodified audit report. "earning #b$ecti%e: &'(> *now t+e auditor7s responsibility for ot+er information in documents containing audited financial statements. /opic: Conditions for Departure /opic: !,planatory "anguage Added to t+e Standard 0n-ualified10nmodified Audit Report /opic: #t+er Information in Documents Containing Audited Financial Statements /opic: Reporting on t+e Financial Statement Audit: /+e Standard 0n-ualified10nmodified Audit Report
18-(/
)'. Cra0ens was as-ed to perform the first audit of a wholesale business that does not maintain perpetual in0entor records. Cra0ens has obser0ed the current in0entor but has not obser0ed the ph sical in0entor at the pre0ious ear-end date and concludes that the opening in0entor balance7 which is not auditable7 is a material factor in the determination of cost of goods sold for the current ear. Cra0ens will probabl A. 6ecline the engagement. 4. >$press an unqualified%unmodified opinion on the balance sheet and income statement e$cept for in0entor . C 5ssue a disclaimer of opinion. 6. 5ssue an ad0erse opinion.
AACSB: Communication AICPA BB: Industry AICPA FN: Reporting Blooms: Apply Difficulty: 2 ?ard "earning #b$ecti%e: &'() *now t+e situations t+at result in t+e addition of e,planatory language to t+e standard un-ualified audit report. "earning #b$ecti%e: &'(2 Be able to e,plain t+e conditions t+at lead to a departure from t+e standard un-ualified1unmodified audit report. "earning #b$ecti%e: &'(3 *now t+e types of financial statement audit reports ot+er t+an un-ualified1unmodified. /opic: Conditions for Departure /opic: !,planatory "anguage Added to t+e Standard 0n-ualified10nmodified Audit Report /opic: /ypes of Financial Statement Audit Reports #t+er t+an 0n-ualified10nmodified
18-(1
)(. 1hen there has been a change in accounting principle that materiall affects the comparabilit of the comparati0e financial statements presented for a public compan and the auditor concurs with the change7 the auditor should
A A. 4. 4. C. C. 6. 6.
AACSB: Communication AICPA BB: Critical /+in4ing AICPA FN: Reporting Blooms: Apply Difficulty: 2 ?ard "earning #b$ecti%e: &'() *now t+e situations t+at result in t+e addition of e,planatory language to t+e standard un-ualified audit report. "earning #b$ecti%e: &'(2 Be able to e,plain t+e conditions t+at lead to a departure from t+e standard un-ualified1unmodified audit report. "earning #b$ecti%e: &'(3 *now t+e types of financial statement audit reports ot+er t+an un-ualified1unmodified. /opic: Conditions for Departure /opic: !,planatory "anguage Added to t+e Standard 0n-ualified10nmodified Audit Report /opic: /ypes of Financial Statement Audit Reports #t+er t+an 0n-ualified10nmodified
18-(#
)). 5n the first audit of a client7 because of the client3s record retention policies7 an auditor was not able to gather sufficient e0idence about the consistent application of accounting principles between the current and the prior ear7 as well as the amounts of assets or liabilities at the beginning of the current ear. 5f the amounts in question could materiall affect current operating results7 the auditor would A 4e unable to e$press an opinion on the current ear3s results of operations and cash flows. 4. >$press a qualified opinion on the financial statements because of a client-imposed scope limitation. C. 1ithdraw from the engagement and refuse to be associated with the financial statements. 6. Specificall state that the financial statements are not comparable to the prior ear because of an uncertaint .
AACSB: Communication AICPA BB: Critical /+in4ing AICPA FN: Reporting Blooms: Apply Difficulty: ) 8edium "earning #b$ecti%e: &'(2 Be able to e,plain t+e conditions t+at lead to a departure from t+e standard un-ualified1unmodified audit report. "earning #b$ecti%e: &'(3 *now t+e types of financial statement audit reports ot+er t+an un-ualified1unmodified. "earning #b$ecti%e: &'(5 0nderstand t+e situations t+at may cause different types of reports on comparati%e financial statements. /opic: Conditions for Departure /opic: Reports on Comparati%e Financial Statements /opic: /ypes of Financial Statement Audit Reports #t+er t+an 0n-ualified10nmodified
)*. A scope limitation sufficient to preclude an unqualified opinion always will result when management A. ,re0ents the auditor from re0iewing the wor-ing papers of the predecessor auditor. 4. >ngages the auditor after the ear-end ph sical in0entor is completed. C. Requests that certain material accounts recei0able not be confirmed. " Refuses to pro0ide a representation letter ac-nowledging its responsibilit for the fair presentation of the financial statements in conformit with +AA,.
AACSB: Communication AICPA BB: Critical /+in4ing AICPA FN: Reporting Blooms: Remember Difficulty: 2 ?ard "earning #b$ecti%e: &'(2 Be able to e,plain t+e conditions t+at lead to a departure from t+e standard un-ualified1unmodified audit report. "earning #b$ecti%e: &'(3 *now t+e types of financial statement audit reports ot+er t+an un-ualified1unmodified. /opic: Conditions for Departure /opic: /ypes of Financial Statement Audit Reports #t+er t+an 0n-ualified10nmodified
18-(&
)8. 5n which of the following situations would an auditor ordinaril choose between e$pressing an =e$cept for= qualified opinion and e$pressing an ad0erse opinion2 A. "he auditor did not obser0e the entit 3s ph sical in0entor and is unable to become satisfied as to its balance b other auditing procedures. ! "he financial statements fail to disclose information that is required b generall accepted accounting principles. C. "he auditor is as-ed to report onl on the entit 3s balance sheet and not on the other basic financial statements. 6. >0ents disclosed in the financial statements cause the auditor to ha0e substantial doubt about the entit 3s abilit to continue as a going concern.
AACSB: Communication AICPA BB: Critical /+in4ing AICPA FN: Reporting Blooms: Apply Difficulty: 2 ?ard "earning #b$ecti%e: &'(2 Be able to e,plain t+e conditions t+at lead to a departure from t+e standard un-ualified1unmodified audit report. "earning #b$ecti%e: &'(3 *now t+e types of financial statement audit reports ot+er t+an un-ualified1unmodified. /opic: Conditions for Departure /opic: /ypes of Financial Statement Audit Reports #t+er t+an 0n-ualified10nmodified
).. 5n an engagement to e$press an opinion on one or more specified elements7 accounts7 or items of a financial statement7 the auditor can generall audit onl those specified elements and not the entire set of financial statements. Cowe0er7 the auditor is required to audit the entire set of financial statements if the elements specified include A. Aet 5ncome. 4. Stoc-holders3 >quit . C 4oth A E 4. 6. Aone of the abo0e.
AACSB: Communication AICPA BB: Industry AICPA FN: Reporting Blooms: Remember Difficulty: 2 ?ard "earning #b$ecti%e: &'(; 0nderstand t+e auditor7s responsibility for reporting on specified elements< accounts< or items of a financial statement. /opic: Specified !lements= Accounts= or Items of a Financial Statement
18-('

Short Answer Questions
*/. Feff Fohns is a staff accountant and has been assigned to the audit of 1orldwide >nterprises7 5nc. Subsequent to the completion of fieldwor-7 Feff was assigned to draft the audit report. "he content of one of the paragraphs he has drafted reads as follows? As e$plained in Aote # to the financial statements7 1orldwide >nterprises has charged goodwill and certain other intangible assets acquired in two separate acquisitions directl to shareholders3 equit . ;nder generall accepted accounting principles7 these intangibles should ha0e been recorded as assets and amorti@ed to income o0er future periods. Cad these intangibles been capitali@ed7 total assets would ha0e increased b G'//7/// as of 6ecember &17 #/11 and net income and earnings per share would be increased b G&8/7/// and G#.#(7 respecti0el (assuming a #/- ear amorti@ation period!. a. 4ased on the contents of the paragraph abo0e7 which condition requiring a departure from a standard unqualified%unmodified opinion e$ists in the engagement2 b. Assuming that the engagement partner agrees with the paragraph Feff has prepared abo0e7 where in the auditor3s report should the paragraph be placed2 c. Cow would the materialit of the condition abo0e affect the final choice of opinion2 a. "he paragraph indicates a departure from +AA,7 which would require a departure from a standard unqualified%unmodified opinion--either qualified or ad0erse7 depending on the materialit of the issue. b. 5f a qualified or an ad0erse report is issued7 the paragraph should be placed before the opinion paragraph. c. A material misstatement would require a qualified opinion. A per0asi0el material misstatement would require an ad0erse opinion.
AACSB: Communication AICPA BB: Critical /+in4ing AICPA FN: Reporting Blooms: Apply Difficulty: ) 8edium "earning #b$ecti%e: &'( 0nderstand t+e %arious components of t+e standard un-ualified financial statement audit report. "earning #b$ecti%e: &'(2 Be able to e,plain t+e conditions t+at lead to a departure from t+e standard un-ualified1unmodified audit report. "earning #b$ecti%e: &'(6 Be able to e,plain t+e effect of materiality on t+e auditor7s c+oice of audit reports. /opic: Conditions for Departure /opic: Reporting on t+e Financial Statement Audit: /+e Standard 0n-ualified10nmodified Audit Report /opic: /+e !ffect of 8ateriality on Financial Statement Reporting
18-((
*1. "he following four situations require a modification to the standard unqualified%unmodified audit report. 5dentif the modification required for each. a. 8pinion based in part on the report of another auditor. b. +oing concern. c. Dac- of consistenc . d. Additional emphasis. a. "his situation results in a modification of the wording for the introductor 7 scope and opinion paragraphs included in the standard unqualified%unmodified report. b. "his situation results in an e$planator %emphasis-of-matter paragraph found after the opinion paragraph. c. "his situation results in an e$planator %emphasis-of-matter paragraph found after the opinion paragraph. d. "his situation results in an e$planator %emphasis-of-matter paragraph found after the opinion paragraph.
AACSB: Communication AICPA BB: Critical /+in4ing AICPA FN: Reporting Blooms: Apply Difficulty: ) 8edium "earning #b$ecti%e: &'() *now t+e situations t+at result in t+e addition of e,planatory language to t+e standard un-ualified audit report. /opic: !,planatory "anguage Added to t+e Standard 0n-ualified10nmodified Audit Report
18-()
*#. Changes in a client3s accounting choices either affect =consistenc = in the application of +AA, or the do not. For each item listed below7 state whether the item affects consistenc and identif the effect the change will ha0e on the audit report. 1. Change in accounting estimate. #. Correction of an error in principle. &. Change in reporting entit . '. Correction of an error that does not in0ol0e an accounting principle. (. Change in accounting principle. ). Change in classification and reclassification. *. Change e$pected to ha0e a material future effect. 1. "his change does not affect consistenc and no modification to the audit report is required. #. "his change affects consistenc and an e$planator %emphasis-of-matter paragraph after the opinion paragraph is required on the audit report. &. "his change affects consistenc and an e$planator %emphasis-of-matter paragraph after the opinion paragraph is required on the audit report. '. "his change does not affect consistenc and no modification to the audit report is required. (. "his change affects consistenc and an e$planator %emphasis-of-matter paragraph after the opinion paragraph is required on the audit report. ). "his change does not affect consistenc and no modification to the audit report is required. *. "his change does not affect consistenc and no modification to the audit report is required.
AACSB: Communication AICPA BB: Critical /+in4ing AICPA FN: Reporting Blooms: Remember Difficulty: ) 8edium "earning #b$ecti%e: &'() *now t+e situations t+at result in t+e addition of e,planatory language to t+e standard un-ualified audit report. /opic: !,planatory "anguage Added to t+e Standard 0n-ualified10nmodified Audit Report
18-(*
*&. For each of the following situations7 indicate what t pe of audit report is most appropriate. a. "he auditor lac-s independence in fact7 but not necessaril in appearance. b. "here is a scope limitation and it is material but the o0erall financial statements are still presented fairl . c. "he uncorrected misstatements are immaterial. d. "here is a departure from +AA, and it is per0asi0el material. a. 6isclaimerI b. :ualifiedI c. ;nqualified%;nmodifiedI d. Ad0erse
AACSB: Communication AICPA BB: Critical /+in4ing AICPA FN: Reporting Blooms: Apply Difficulty: !asy "earning #b$ecti%e: &'(2 Be able to e,plain t+e conditions t+at lead to a departure from t+e standard un-ualified1unmodified audit report. /opic: Conditions for Departure
18-(8
*'. 5dentif the special purpose framewor- used in each of the following situations. 1. A real estate compan reports to its partners on the basis used to complete the income ta$ return. #. A compan has its financial statements prepared on a price-le0el ad<usted basis as required b its lender. &. An insurance compan reports in compliance with the rules of a state insurance commission. '. A partnership reports on re0enues recei0ed and e$penses paid. 1hat modifications must be made to the standard auditor3s report for these situations2 1. "a$ basisI #. Contractual basisI &. Regulator basisI '. Cash basis. "he financial statements listed in the introductor paragraph must be titled so the are not confused with financial statements prepared on a +AA, basis. Also7 the basis used to prepare the financial statements should be stated7 as well as a reference to the note in the financial statements that describes the basis in more detail. 5n some situations (regulator basis!7 a paragraph restricting the use of the financial statements must also be included.
AACSB: Communication AICPA BB: Industry AICPA FN: Reporting Blooms: Apply Difficulty: ) 8edium "earning #b$ecti%e: &'(& 0nderstand t+e auditor7s reporting responsibility for financial statements prepared on a basis ot+er t+an :AAP. /opic: Financial Statement Prepared According to a Special Purpose Framewor4
18-(.
*(. 6iscuss the conditions that prohibit the auditor from issuing an unqualified%unmodified opinion and the t pes of reports that the auditor ma issue for a financial statement audit. "here are three circumstances that ma require a departure from an unqualified%unmodified audit report? 1. Scope limitation. A scope limitation results from an inabilit to collect sufficient appropriate e0idence7 such as when management pre0ents the auditor from conducting an audit procedure considered necessar . #. 6eparture from +AA,. "he financial statements are affected b a departure from +AA,. &. Dac- of auditor independence. "he auditor must compl with the second general standard and the Code of ,rofessional Conduct in order to issue an unqualified%unmodified opinion. "he three t pes of reports other than the standard unqualified%unmodified are? 1. :ualified. "he auditor3s opinion is qualified because of either a scope limitation or a departure from a +AA,7 but o0erall the financial statements present fairl . #. 6isclaimer. "he auditor disclaims an opinion on the financial statements either because there is insufficient appropriate e0idence to form an opinion on the o0erall financial statements or because there is a lac- of independence. &. Ad0erse. "he auditor3s opinion states that the financial statements do not present fairl in conformit with +AA, because the departure materiall affects the o0erall financial statements.
AACSB: Communication AICPA BB: Industry AICPA FN: Reporting Blooms: 0nderstand Difficulty: ) 8edium "earning #b$ecti%e: &'(2 Be able to e,plain t+e conditions t+at lead to a departure from t+e standard un-ualified1unmodified audit report. "earning #b$ecti%e: &'(3 *now t+e types of financial statement audit reports ot+er t+an un-ualified1unmodified. /opic: Conditions for Departure /opic: /ypes of Financial Statement Audit Reports #t+er t+an 0n-ualified10nmodified
18-)/

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Chapter 18 - Reports on Audited Financial Statements

Chapter 18 Reports on Audited Financial Statements

Chapter 18 - Reports on Audited Financial Statements

Multiple Choice Questions

Chapter 18 - Reports on Audited Financial Statements

Chapter 18 - Reports on Audited Financial Statements

Chapter 18 - Reports on Audited Financial Statements

Chapter 18 - Reports on Audited Financial Statements

Chapter 18 - Reports on Audited Financial Statements

Chapter 18 - Reports on Audited Financial Statements

Chapter 18 - Reports on Audited Financial Statements

Chapter 18 - Reports on Audited Financial Statements

Chapter 18 - Reports on Audited Financial Statements

Chapter 18 - Reports on Audited Financial Statements

Chapter 18 - Reports on Audited Financial Statements

Chapter 18 - Reports on Audited Financial Statements

Chapter 18 - Reports on Audited Financial Statements

Chapter 18 - Reports on Audited Financial Statements

Chapter 18 - Reports on Audited Financial Statements

Chapter 18 - Reports on Audited Financial Statements

Short Answer Questions

Chapter 18 - Reports on Audited Financial Statements

Chapter 18 - Reports on Audited Financial Statements

Chapter 18 - Reports on Audited Financial Statements

Chapter 18 Reports on Audited Financial Statements Answer He

True / False Questions

Chapter 18 - Reports on Audited Financial Statements

Chapter 18 - Reports on Audited Financial Statements

Chapter 18 - Reports on Audited Financial Statements

Multiple Choice Questions

Chapter 18 - Reports on Audited Financial Statements

Chapter 18 - Reports on Audited Financial Statements

Chapter 18 - Reports on Audited Financial Statements

Chapter 18 - Reports on Audited Financial Statements

Chapter 18 - Reports on Audited Financial Statements

Chapter 18 - Reports on Audited Financial Statements

Chapter 18 - Reports on Audited Financial Statements

Chapter 18 - Reports on Audited Financial Statements

Chapter 18 - Reports on Audited Financial Statements

Chapter 18 - Reports on Audited Financial Statements

Chapter 18 - Reports on Audited Financial Statements

Chapter 18 - Reports on Audited Financial Statements

Chapter 18 - Reports on Audited Financial Statements

Chapter 18 - Reports on Audited Financial Statements

Chapter 18 - Reports on Audited Financial Statements

Chapter 18 - Reports on Audited Financial Statements

Chapter 18 - Reports on Audited Financial Statements

Chapter 18 - Reports on Audited Financial Statements

Chapter 18 - Reports on Audited Financial Statements

Chapter 18 - Reports on Audited Financial Statements

Chapter 18 - Reports on Audited Financial Statements

Chapter 18 - Reports on Audited Financial Statements

Chapter 18 - Reports on Audited Financial Statements

Chapter 18 - Reports on Audited Financial Statements

Chapter 18 - Reports on Audited Financial Statements

Chapter 18 - Reports on Audited Financial Statements

Chapter 18 - Reports on Audited Financial Statements

Chapter 18 - Reports on Audited Financial Statements

Chapter 18 - Reports on Audited Financial Statements

Chapter 18 - Reports on Audited Financial Statements

Chapter 18 - Reports on Audited Financial Statements

Chapter 18 - Reports on Audited Financial Statements

Chapter 18 - Reports on Audited Financial Statements