Choice CH03P
Multiple Identify the letter of the choice that best completes the statement or answers the question. 1. An auditor's report contains the following sentences: We did not audit the financial statements of B Company, a consolidated subsidiary, which 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 a. Disclaim an opinion. b. Qualify the opinion. c. Divide responsibility. d. Should not be part of the audit report. ANSWER: C NOTES: REF: 2. In which of the following situations would the auditor appropriately issue a standard unqualified report with no explanatory paragraph concerning consistency? a. A change in the method of accounting for specific subsidiaries that comprise the group of companies for which consolidated statements are presented. b. A change from an accounting principle that is not generally accepted to one that is generally accepted. c. A change in the percentage used to calculate the provision for warranty expense. d. Correction of a mistake in the application of a generally accepted accounting principle. ANSWER: C NOTES: REF: 3. When financial statements are presented that are not in conformity with generally accepted accounting principles, an auditor may issue a(n) Qualified opinion Adverse opinion
a. b. c. d.
Yes Yes No No
No Yes Yes No
ANSWER: B NOTES: REF: 4. 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 a. Qualified due to inadequate disclosure. b. Qualified due to a scope limitation. c. Adverse. d. Unqualified. ANSWER: A NOTES: REF: 5. An auditor would issue an adverse opinion if a. The audit was begun by other independent auditors who withdrew from the engagement. b. A qualified opinion cannot be given because the auditor lacks independence. c. The restriction on the scope of the audit was significant. d. The statements as a whole are not presented fairly. ANSWER: D NOTES: REF: 6. An auditor's opinion reads as follows: "In our opinion, except for the above-mentioned limitation on the scope of our audit..." This is an example of a(n) a. Review opinion. b. Emphasis on a matter. c. Qualified opinion. d. Unacceptable reporting practice. ANSWER: D NOTES: REF: 7. An auditor's report includes a statement that "the financial statements do not present fairly the financial position in conformity with generally accepted accounting
principles." This auditor's report was probably issued in connection with financial statements that were a. Prepared on a comprehensive basis for accounting other than GAAP. b. Restricted for use by management. c. Misleading. d. Condensed. ANSWER: C NOTES: REF: 8. If the auditor believes there is minimal likelihood that resolution of an uncertainty will have a material effect on the financial statements, the auditor would issue a(n) a. Qualified opinion. b. Adverse opinion. c. Unqualified opinion. d. Disclaimer of opinion. ANSWER: C NOTES: REF: 9. If an accounting change has no material effect on the financial statements in the current year but the change is reasonably certain to have a material effect in later years, the change should be a. Treated as a consistency modification in the auditor's report for the current year. b. Disclosed in the notes to the financial statements of the current year. c. Disclosed in the notes to the financial statements and referred to in the auditor's report for the current year. d. Explained in the auditor's report for the current year and disclosed in the notes of the later years. ANSWER: B NOTES: REF: 10. When comparative financial statements are presented, the fourth reporting standard, which refers to financial statements "taken as a whole," should be considered to apply to the financial statement of the a. Periods presented plus one preceding period. b. Current period only. c. Current period and those of the other periods presented. d. Current and immediately preceding period only. ANSWER: C
NOTES: REF: 11. The client uses the last-in, first-out method to value half of its inventory and the first-in, first-out method to value the other half. Assuming the auditor is satisfied in all other respects, under these circumstances the auditor will issue a(n) a. Opinion modified due to inconsistency. b. Unqualified opinion with an explanatory middle paragraph. c. Qualified or adverse opinion, depending on materiality. d. Unqualified opinion. ANSWER: D NOTES: REF: 12. Under which of the following sets of circumstances might an auditor disclaim an opinion? a. The financial statements contain a departure from GAAP which is material. b. The principal auditor decides to make reference to the report of another auditor who audited a subsidiary. c. There has been a material change between periods in the method of the application of accounting principles. d. There were significant limitations on the scope of the audit. ANSWER: D NOTES: REF: 13. An auditor includes an explanatory paragraph in an unqualified report to emphasize that the entity being reported on is a subsidiary of another business enterprise. The inclusion of this paragraph a. Is appropriate and does not negate the unqualified opinion. b. Results in the unqualified report becoming a qualified report. c. Is a violation of generally accepted reporting standards if this information is disclosed in footnotes to the financial statements. d. Necessitates a revision of the opinion paragraph to include the phrase "with the foregoing explanation." ANSWER: A NOTES: REF: 14. In which of the following circumstances is an adverse opinion appropriate? a. The auditor is not independent with respect to the enterprise being audited.
b. An uncertainty prevents the issuance of an unqualified report. c. The financial statements are not in conformity with authoritative standards for accounting for very material transactions. d. A client-imposed scope limitation prevents the auditor from complying with generally accepted auditing standards. ANSWER: C NOTES: REF: 15. An audit report should be dated as of a. The date the report is delivered to the client. b. The last day of field work. c. The balance sheet date of the latest period reported on. d. The date a letter of audit inquiry is received from the entity's attorney of record. ANSWER: B NOTES: REF: 16. An auditor completed fieldwork on February 10, Year 2 for a December 31, Year 1 yearend client. A significant subsequent event occurred on February 22, Year 2, which the auditor examined. Which of the following report dates is most appropriate? a. February 10, Year 2. b. February 10, except for Note 1, February 22, Year 2. c. December 31, Year 1. d. December 31, Year 2. ANSWER: B NOTES: REF: 17. Which of the following statements indicates a qualified opinion? a. The financial statements do not present fairly in all material respects the financial position, results of operations, and cash flows in conformity with GAAP. b. The auditor does not express an opinion on the financial statements. c. The financial statements present fairly in all material respects the financial position, results of operations, and cash flows in conformity with GAAP. d. Except for the effects of a matter, the financial statements present fairly in all material respects the financial position, results of operations, and cash flows in conformity with GAAP. ANSWER: D
NOTES: REF: 18. Under Statement on Auditing Standards No. 59, "The Auditor's Consideration of an Entity's Ability to Continue as a Going Concern," an independent auditor is responsible to a. Predict whether the entity will be in business one year from the balance sheet date. b. Evaluate whether there is substantial doubt about the entity's ability to continue as a going concern. c. Make a request to legal counsel regarding whether the client will be a going concern one year from the balance sheet date. d. Report the entity's ability to continue as a going concern to senior management and to the board of directors. ANSWER: B NOTES: REF: 19. Does an auditor make the following representations explicitly or implicitly in a standard audit report on comparative financial statements? Consistent application of accounting principles a. Explicitly b. Implicitly c. Implicitly d. Explicitly ANSWER: C NOTES: REF: 20. An auditor is unable to determine the amounts associated with illegal acts committed by a client. The auditor most likely issues a. Either a qualified opinion or a disclaimer of opinion. b. An adverse opinion. c. Either a qualified opinion or an adverse opinion. d. A disclaimer of opinion. ANSWER: A NOTES: REF: 21. A principal auditor is satisfied both with the independence and professional reputation of another auditor who audited a subsidiary, but wants to share responsibility with the other Examination of evidence on a test basis Explicitly Implicitly Explicitly Implicitly
auditor in the audit report. The principal auditor should a. Modify the scope and opinion paragraphs of the report. b. Modify the introductory and opinion paragraphs of the report. c. Not modify the report except for including an explanatory paragraph. d. Modify the opinion paragraph of the report. ANSWER: B NOTES: REF: 22. An auditor may issue a qualified opinion for Inadequate Scope Disclosure Limitation a. Yes Yes b. Yes No c. No Yes d. No No ANSWER: A NOTES: REF: 23. An explanatory paragraph following an opinion paragraph describes an uncertainty as 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? a. Unqualified. b. Qualified. c. Disclaimer. d. Adverse. ANSWER: A NOTES: REF: 24. An auditor's report that refers to a departure from generally accepted accounting principles includes the language, "In our opinion, with the foregoing explanation, the financial statements referred to above present fairly ..." This is a(n) a. Adverse opinion.
b. Qualified opinion. c. Unqualified opinion with an explanatory paragraph. d. Example of inappropriate reporting. ANSWER: D NOTES: REF: 25. 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. A qualified opinion. b. An unqualified opinion with an explanatory paragraph. c. A disclaimer of opinion. d. An adverse opinion. ANSWER: B NOTES: REF: 26. An auditor concludes that there is substantial doubt about an entity's ability to continue as a going concern. If the entity's disclosures about continued existence are adequate, the audit report may include A disclaimer of opinion a. Yes b. No c. No d. Yes ANSWER: B NOTES: REF: 27. The CPA receives a letter from the client's independent counsel stating that the Federal Communications Commission is not renewing the client's broadcasting license because of alleged irregularities. The client and its independent counsel plan to take all necessary legal action to retain the license. However, a favorable outcome of any legal action is highly uncertain. What action should the auditor take? a. Issue an unqualified opinion, with an explanatory paragraph that describes the matter which gives rise to the uncertainty. b. Issue an unqualified opinion if full disclosure is made of the matter in a note to the financial statements. c. Issue an adverse opinion and disclose all reasons why. d. Issue a piecemeal opinion with full disclosure made of the license A qualified opinion Yes No Yes No
dispute in a note to the financial statements. ANSWER: A NOTES: REF: 28. If the auditor believes that required disclosures are omitted from the financial statements, the auditor should decide between a. issuing A qualified opinion or an adverse opinion. b. A disclaimer of opinion or a qualified opinion. c. An adverse opinion or a disclaimer of opinion. d. An unqualified opinion or a qualified opinion. ANSWER: D NOTES: REF: 29. An auditor's report on comparative financial statements should be dated as of the date the a. Report is issued. b. Auditor's fieldwork is completed. c. Fiscal year ends. d. Last subsequent event occurred. ANSWER: B NOTES: REF: 30. An auditor is confronted with an exception sufficiently material to warrant departing from the standard wording of an unqualified report. If the exception relates to a departure from generally accepted accounting principles, the auditor must decide between a. An adverse opinion and an unqualified opinion. b. An adverse opinion and a qualified opinion. c. An adverse opinion and a disclaimer of opinion. d. A disclaimer of opinion and a qualified opinion. ANSWER: B NOTES: REF: 31. An auditor had expressed a qualified opinion on the financial statements of a prior period because the client's financial statements departed from generally accepted accounting principles. The prior period statements are restated in the current period to conform with generally accepted accounting principles. The auditor's updated report on the prior period statements should
a. Express an unqualified opinion about the restated financial statements and disclose the date of the prior report, the type of opinion expressed, the circumstances that caused a different opinion in the prior year, and the fact that the auditor's updated opinion for the prior year is now different. b. Express an unqualified opinion about the restated financial statements and be accompanied by the auditor's original report on the prior period. c. Be accompanied by the auditor's original report on the prior period and bear the same date as the auditor's original report on the prior period. d. Qualify the opinion concerning the restated financial statements because of a change in accounting principles. ANSWER: A NOTES: REF: 32. Under the Sarbanes-Oxley Act, the CEO and CFO certify that they a. Have reviewed the monthly financial statements. b. Are responsible for evaluating the effectiveness of internal control. c. Have overseen the evaluation of the effectiveness of internal control. d. Have identified to the SEC any fraud involving management. ANSWER: B NOTES: REF: 33. The audit firm completes the engagement and then discovers it is not independent of the client. The appropriate opinion a. Is a disclaimer accompanied by an explanation of the reasons for the lack of independence. b. Is a three paragraph opinion in which the opinion paragraph is a disclaimer. c. Is a one paragraph disclaimer of opinion. d. Consists of a disclaimer paragraph added to the standard three paragraph report. ANSWER: C NOTES: REF: 34. The most appropriate title for the auditor's report is a. Independent Accountant's Report. b. Auditor's Report. c. Independent Attestor's Report.
d. Independent Auditor's Report. ANSWER: D NOTES: REF: 35. The Sarbanes-Oxley Act requires the CEO and CFO to certify that a. They have evaluated the effectiveness of internal control. b. They have evaluated the monthly financial statements. c. They have communicated with the Audit Committee regarding the annual financial statements. d. There is no fraud in the financial statements. ANSWER: A NOTES: REF: 36. In auditing the financial statements of a U.S. corporation that are prepared using the accounting principles of another country, an auditor a. Revalues certain assets to adjust for inflation. b. Is required to use the report format of the other country. c. Complies with U.S. general and field work standards. d. Modifies the financial statements to conform to U.S. GAAP. ANSWER: C NOTES: REF: 37. In an attest engagement, a. Three types of opinions are permitted. b. The attestor develops the criteria against which the assertions are evaluated. c. Management makes assertions which the attestor evaluates. d. The attestor utilizes standards developed by Consumers Union. ANSWER: C NOTES: REF:
Essay 38. When would an auditor issue an adverse opinion? RESPONSE: ANSWER: Adverse opinions are issued when financial statements depart from GAAP
or when management is unable to justify an accounting change (and the effect of the departure or change is so highly material that a qualified opinion is unwarranted). NOTES: REF: 39. When the client limits the scope of an audit engagement and the auditor believes this limitation of scope to be very material in nature, what opinion is issued by the auditor? RESPONSE: ANSWER: The auditor issues a disclaimer of opinion. NOTES: REF: 40. An opinion is based upon the work of separate auditors. In expressing an opinion on the combined statements, how is the principal auditor determined? RESPONSE: ANSWER: AU Sec. 543 requires that the following factors be considered: The materiality of the financial statements audited by each auditor, The extent of each auditor's knowledge of the overall financial statements, The significance of the financial statements audited in relation to the combined entity taken as a whole. NOTES: REF: 41. What type of audit opinion is issued to reflect a material departure from GAAP? Explain the modifications needed to be made to the audit report. RESPONSE: ANSWER: A qualified opinion is required for a material departure from GAAP. The opinion requires an explanatory paragraph to disclose the misstatement and a modified opinion paragraph. NOTES: REF:
Problem 42. As the independent auditor for The Company, you completed the audit engagement for the year ended August 31, Year 1 on October 1, Year 1. The Company's audit revealed no irregularities in the accounting system and you have concluded that management's financial statements are presented fairly in all material respects in conformity with GAAP.
Required: Produce an audit report for this client addressed to the Board of Directors and company shareholders. RESPONSE: ANSWER: Independent Auditor's Report To the Board of Directors and Shareholders of The Company We have audited the accompanying balance sheets of The Company as of August 31, Year 1 and the related statements of earnings, retained earnings, and cash flows for the period ended August 31, Year 1. These financial statements are the responsibility of the companies' management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with U.S. generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the company at August 31, Year 1, and the results of operations and cash flows for the period ended August 31, Year 1, in conformity with U.S. generally accepted accounting principles. Student's Company Name October 1, Year 1 NOTES: REF: 43. Based upon the information given, determine for each of the following ten companies: a. Which type of audit report will be issued b. Which (if any) paragraphs of the audit report require modification c. If explanatory paragraph by deemed necessary
Company Company A Company B Company C Company D Company E Company F Company G Company H Company I Company J
Circumstance Departure from GAAP Lack of Independence Scope Limitation Opinion based partly on another auditor's work Going Concern Emphasize a Matter Departure from GAAP Going Concern Opinion based partly on another auditor's work Inconsistency that management can justify
Level of Materiality Material Highly Material Material Material Material Highly Material Highly Material Highly Material Highly Material Material
RESPONSE: ANSWER: Company (a) Form of (b) Paragraph(s) (c) Audit Report Modified Explanatory Paragraph Necessary Qualified Opinion Yes Disclaimer Omit Introductory, Yes Scope, Opinion Qualified Scope/Opinion Yes Unqualified Introductory/Opinion No Unqualified N/A Yes Unqualified N/A Yes Adverse Opinion Yes Unqualified N/A Yes Unqualified Introductory/Opinion Yes Unqualified N/A Yes
Company A Company B Company C Company D Company E Company F Company G Company H Company I Company J NOTES: REF:
True/False Indicate whether the sentence or statement is true or false. 44. An unqualified opinion attests to the quality of the client entity as an investment. ANSWER: F An unqualified opinion pertains to the client's financial statements, not to
the quality of the entity as in investment or credit risk. NOTES: REF: 45. The standard scope paragraph describes in detail the tests which the auditor performed. ANSWER: F The standard scope paragraph describes briefly what an audit entails. NOTES: REF: 46. Auditors may issue an opinion on the balance sheet only. ANSWER: T SAS 58 permits auditors to issue an opinion on an individual financial statement. NOTES: REF: 47. Subsequent events are material events which occur between the end of the fiscal year and the date the audit report is issued. ANSWER: F Subsequent events are material events which occur between the end of the fiscal year and the completion of field work (which is the date of the audit report, not the date it is issued). NOTES: REF: 48. Dual dating of an auditor's report extends an auditor's responsibility only for the event to which the later date refers. ANSWER: T Dual dating extends an auditor's responsibility beyond the last day of field work to the later date only for the event to which the later date refers. NOTES: REF: 49. The U.S. Foreign Corrupt Practices Act places U.S. companies at a disadvantage in competing in foreign countries. ANSWER: T The FCPA prohibits U.S. companies from unlawfully influencing foreign governments, which places them at a disadvantage. NOTES: REF:
50. Rather than "present fairly," an audit report issued for a company in another country may include the phrase "true and fair view." ANSWER: T "True and fair view" is used for example in the European Union rather than "present fairly." NOTES: REF: 51. A disclaimer of opinion is appropriate when management is unable to justify a change in accounting principle. ANSWER: F Either a qualified or an adverse opinion is appropriate if management cannot justify a change in accounting principle. NOTES: REF: 52. If an auditor is not independent, two of the four types of opinion may be appropriate. ANSWER: F Only a disclaimer may be issued if an auditor is not independent. NOTES: REF: 53. Once an audit firm has made the determination that it is the principal auditor, reference must be made in the report to the other auditor's work. ANSWER: F The principal auditor typically decides to refer to the other auditor's work in the report, but is not required to. NOTES: REF:
Matching Match the following: a. Shareholders, Board of Directors, or both b. Independent Auditor's Report c. States the auditor's opinion on the financial statements d. Responsible for identifying all significant deficiencies in the design of internal controls e. Remained unchanged from 1949 to 1988 f. A letter which includes the attestor's opinion
g. Does not have generally accepted standards of reporting h. Paragraph of the auditor's report which identifies the financial statements i. Includes "except for" language j. For nonpublic companies, states that the engagement complied with GAAS in the U.S. 54. Title of auditor's report ANSWER: B NOTES: REF: 55. Opinion paragraph ANSWER: C NOTES: REF: 56. Scope paragraph ANSWER: J NOTES: REF: 57. Assurance services ANSWER: G NOTES: REF: 58. Management ANSWER: D NOTES: REF: 59. Addressee of the auditor's report ANSWER: A NOTES: REF: 60. Attestation report ANSWER: F
NOTES: REF: 61. Qualified report ANSWER: I NOTES: REF: 62. Standard audit report ANSWER: E NOTES: REF: 63. Introductory paragraph ANSWER: H NOTES: REF: