Auditing Theory - Audit Reports

3/28/2016 Auditing
Theory Audit Reports
Auditing Theory Audit Reports LIZA
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Your score: 48% (24 points out of 50)
Question #1 (1 point)
Which of the following is least likely to result in qualification of the auditors' opinion due to a scope limitation?
Your answer:
Scope limitations imposed by the client. Incorrect
Correct answer:
Reliance placed upon the report of component auditors.
The On the Wings of Love Company changed accounting principles in 2015 from those followed in 2014. The
auditor believes that the new principles are not in conformity with GAAP, and therefore that the 2015 financial
statements are misleading due to pervasive misstatements. The change (including its dollar effect) has been
described in the notes to the 2015 statements, which are being presented by themselves. Under these
circumstances, in reporting on the 2015 financial statements, the auditor should:
Your answer:
Express an adverse opinion with a basis for modification paragraph disclosing the reason (the accounting
change) for the opinion. Correct
The term "except for" in an audit report is:
Your answer:
Used for an unmodified opinion when an emphasis of matter paragraph is added. Incorrect
Correct answer:
Used in a qualified opinion
After considering an entity's negative trends and financial difficulties, an auditor has substantial doubt about
the entity's ability to continue as a going concern. The auditor's considerations relating to management's plans
for dealing with the adverse effects of these conditions most likely would include management's plans to:
Your answer:
Increase ownership equity. Correct
After performing all necessary procedures the predecessor auditors reissue a priorperiod report on financial
statements at the request of the client without revising the original wording. The predecessor auditors should:
Your answer:
Use the reissue date. Incorrect
Correct answer:
Use the date of the previous report.
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3/28/2016 Auditing Theory Audit Reports
Which of the following is not a difference between the audit report of a nonpublic and public company?
Your answer:
The public company report has an additional paragraph referring to the client's fraud prevention procedures.
Correct
If group auditors make no reference to component auditors whose work they have relied on as a part of the
basis for their report, the group auditors:
Your answer:
Are not required to investigate the professional reputation of the component auditors. Incorrect
Correct answer:
Are assuming responsibility for the work of the component auditors.
Serena, CPA, is the group auditor for a multinational corporation. Another CPA has examined and reported on
the financial statements of a significant subsidiary of the corporation. Serena is satisfied with the independence
and professional reputation of the component auditor, as well as the quality of the component auditor's audit.
With respect to Serena's report on the consolidated financial statements, taken as a whole, Serena:
Your answer:
May refer to the audit of the component auditor. Correct
It is not appropriate for the auditors' report to refer a reader to a financial statement note for details regarding
a(an):
Your answer:
Limitation in the scope of the audit. Correct
A client has changed the salvage values of a number of its fixed assets. The auditors believe that the salvage
values are realistic. The appropriate report on the financial statements is:
Your answer:
Unmodified with explanatory language as to consistency. Incorrect
Correct answer:
Standard unmodified.
Which of the following will result in emphasis of matter as to consistency in the auditor's report, regardless of
whether the item is fully disclosed in the financial statements?
Your answer:
A change in accounting estimate. Incorrect
Correct answer:
A change from an unacceptable accounting principle to a generally accepted one.
When an independent auditor expresses an unqualified opinion he asserts that:
I. He performed the audit in accordance with generally accepted auditing standards.
II. The company is a profitable and viable entity.
III. The financial statements examined are in conformity with GAAP.
IV. The financial statements are accurate and free of errors.
Your answer:
Only statements (I) and (III) are true. Correct
An audit report should be dated as of the
Your answer:
date the report is delivered to the entity audited. Incorrect
Correct answer:
date the financial statements were approved by the client management.
If a company’s external auditor expresses an unqualified opinion as a result of the audit of the company’s
financial statements, readers of the audit report can assume that
Your answer:
All material disagreements between the company and external auditor about the application of accounting
principles were resolved in the satisfaction of the external auditor. Correct
A statement that the auditor’s responsibility is to express an opinion on the financial statements is contained
in the:
Your answer:
Opening and scope paragraph Incorrect
Correct answer:
Opening paragraph
The description of an audit in the scope paragraph of the standard audit report includes all of the following
except:
Your answer:
Assessing control risk. Correct
If comparative financial statements are presented and the present auditor has audited both years, the auditor
should:
Your answer:
Dual date the report Incorrect
Correct answer:
Update the report
In which of the following situations would the auditor appropriately issue a standard unqualified report with no
explanatory paragraph concerning consistency?
Your answer:
A change in the percentage used to calculate the provision for warranty expense. Correct
An auditor’s report contains the following sentences:
"We did not audit the financial statements of B Company, a consolidated subsidiary, whose statements reflect
total assets and revenues constituting 20 percent and 22 percent, respectively, of the related consolidated
totals. These statements were audited by other auditors, whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for B Company, is based solely upon the report of the
other auditors."
These sentences
Your answer:
should not be part of the audit report Incorrect
Correct answer:
divide responsibility
The management of a client company believes that the statement of cash flow is not a useful document and
refuses to include one in the annual report to stockholders. As a result, the auditor’s opinion should be
Your answer:
qualified due to inadequate disclosure Correct
An auditor’s opinion reads as follows: “In our opinion, except for the abovementioned limitation on the scope
of our audit…” This is an example of a(n)
Your answer:
unacceptable reporting practice Correct
Probinsyano Company’s financial statements contain a departure from generally accepted accounting principles
because, due to unusual circumstances, the statements would otherwise be misleading. The auditor should
express an opinion that is
Your answer:
Qualified or adverse, depending on materiality, and describe the departure in a separate paragraph.
Incorrect
Correct answer:
Unqualified and describe the departure in a separate paragraph.
An auditor is unable to determine the amounts associated with illegal acts committed by a client. The auditor
would most likely issue
Your answer:
Either a qualified opinion or a disclaimer of opinion. Correct
The objective of the consistency standard is to provide assurance that
Your answer:
There are no variations in the format and presentation of financial statements. Incorrect
Correct answer:
The comparability of financial statements between periods is not materially affected by changes in accounting
principles without disclosure.
If management fails to provide adequate justification for a change from one generally accepted accounting
principle to another, the auditor should
Your answer:
Add an explanatory paragraph and express a qualified or an adverse opinion for lack of conformity with
generally accepted accounting principles. Correct
An auditor may not express a qualified opinion when
Your answer:
The auditor’s report refers to the work of a specialist. Incorrect
Correct answer:
The auditor lacks independence with respect to the audited entity
An auditor decides to express a qualified opinion on an entity’s financial statements because a major
inadequacy in its computerized accounting records prevents the auditor from applying necessary procedures.
The opinion paragraph of the auditor’s report should state that the qualification pertains to
Your answer:
Inadequate disclosure of necessary information. Incorrect
Correct answer:
The possible effects on the financial statements.
When management prepares financial statements on the basis of a going concern and the auditor believes the
company may not continue as a going concern, the auditor should issue a(n)
Your answer:
qualified opinion Incorrect
Correct answer:
unqualified opinion with an explanatory paragraph
A dual dated report contains the dates of a subsequent event and the date the:
Your answer:
Subsequent event was resolved Incorrect
Correct answer:
Auditor completed work in the client’s office
If the principal auditor decides to take responsibility for the work of other auditors, the principal auditor should:
Your answer:
Issue a standard report Correct
An auditor who concludes that an uncertainty is not adequately disclosed in the financial statements should
issue a:
Your answer:
Unqualified report with an explanatory paragraph. Incorrect
Correct answer:
Qualified report.
An auditor may wish to emphasize a matter included in the financial statements by adding an explanatory
paragraph to the audit report. In this case the following paragraphs of the audit report should be modified:
Your answer:
None Correct
In the case of a client imposed scope limitation, the auditor must consider issuing a:
Your answer:
Qualified opinion or disclaimer of opinion Incorrect
Correct answer:
Disclaimer of opinion
Which of the following modifications of the standard auditor’s report does not require an explanatory
paragraph.
Your answer:
Scope limitation Incorrect
Correct answer:
Reference to other auditors
Pamela, CPA, was engaged to audit the financial statements of One Co. after its fiscal year had ended. The
timing of Pamela’s appointment as auditor and the start of field work made confirmation of accounts receivable
by direct communication with the debtors ineffective. However, Pamela applied other procedures and was
satisfied as to the reasonableness of the account balances. Pamela’s auditor’s report most likely contained a(n)
Your answer:
Unqualified opinion. Correct
A limitation on the scope of an audit sufficient to preclude an unqualified opinion will always result when
management
Your answer:
Refuses to furnish a management representation letter to the auditor. Correct
When an auditor expresses an opinion other than unqualified opinion, a clear description of all substantive
reasons for the modification of the opinion should be included in the report. This explanation should be
presented:
Your answer:
As a separate paragraph, preferably after the opinion paragraph, of the audit report. Incorrect
Correct answer:
As a separate paragraph that precedes the opinion paragraph of the audit report.
Where a limitation on the scope of the auditor’s work requires modification of an unqualified opinion, the
auditor’s report should describe the limitation and:
Your answer:
Indicate that the auditor is not satisfied of the results of the alternative procedures that he had performed.
Incorrect
Correct answer:
Indicate the possible adjustments to the financial statements that might have been determined to be
necessary had the limitation not existed.
What is the purpose of the following paragraph in a particular audit report:
“…We draw attention to note X in the financial statements which discusses that the company incurred a net
loss of P6.4 million during the year ended December 31, 2004 and as of that date, the Company’s liabilities
exceeded its total assets by P2,500,000...”
Your answer:
An inappropriate reporting. Incorrect
Correct answer:
Emphasis of matter about the going concern problems of the entity.
An explanatory paragraph following an opinion paragraph that describes an uncertainty follows:
As discussed in Note X to the financial statements, the company is a defendant in a lawsuit alleging
infringement of certain patent rights and claiming damages. Discovery proceedings are in progress. The
ultimate outcome of the litigation cannot presently be determined. Accordingly, no provision for any liability
that may result upon adjudication has been made in the accompanying financial statements.
What type of opinion should the auditor express in this circumstance?
Your answer:
unqualified Correct
If an amendment to other information in a document containing audited financial statements is necessary and
the entity refuses to make the amendment, the auditor would consider issuing:
Your answer:
Unqualified opinion with explanatory paragraph Correct
When management does not amend the financial statements in circumstances where the auditor believes
they need to be amended and the auditor’s report has not been released to the entity, the auditor should
express
Your answer:
Qualified or disclaimer of opinion Incorrect
Correct answer:
Qualified or adverse opinion
If subsequent to the issuance of the audited financial statements, the auditor becomes aware of material
misstatements in the financial statements that exist prior to the date of the audit report, the auditor should
Your answer:
Notify the parties who currently relying on the financial statements. Incorrect
Correct answer:
Discuss the matter with management, and should take the action appropriate in the circumstances.
Which of the following is not explicitly included in the opening paragraph of an audit report?
Your answer:
A statement by the auditor that the audit provides a reasonable basis for the opinion. Correct
After issuing a report, a auditor has no longer obligation to make continuing inquiries or perform other
procedures concerning the audited financial statements, unless
Your answer:
Information, which existed at the report date and may affect the report, comes to the auditor’s attention.
Correct
Which of the following events occurring after the issuance of an auditor’s report most likely would cause the
auditor to make further inquiries about the previously issued financial statements?
Your answer:
The discovery of information regarding a contingency that existed before the financial statements were issued.
Correct
An auditor would issue an adverse opinion if
Your answer:
The statements taken as a whole do not fairly present the financial condition and results of operations of the
company. Correct
An audit report contains the following paragraph:
"Because of the inadequacies in the company's accounting records during the year ended June 30, 2005, it
was not practicable to extend our auditing procedures to the extent necessary to enable us to obtain certain
evidential matter as it relates to classification of certain items in the consolidated statements of operations."
This paragraph most likely describes
Your answer:
A matter that the auditor wishes to emphasize and that does not lead to a qualified audit opinion.
Incorrect
Correct answer:
A material scope restriction requiring a qualification of the audit opinion.
Soon after Boyd's audit report was issued, Boyd learned of certain related party transactions that occurred
during the year under audit. These transactions were not disclosed in the notes to the financial statements.
Boyd should
Your answer:
Recall all copies of the audited financial statements. Incorrect
Correct answer:
Determine whether the lack of disclosure would affect the auditor's report.
Which of the following best describes the auditor's responsibility for "other information" included in the annual
report to stockholders which contains financial statements and the auditor's report?
Your answer:
The auditor has no obligation to corroborate the "other information," but should read the "other information"
to determine whether it is materially inconsistent with the financial statements. Correct

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