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Unformatted text preview: erial, but not highly material, departures from GAAP.
3-19 The three alternative opinions that may be appropriate when the client's financial
statements are not in accordance with GAAP are an unqualified opinion, qualified as to
opinion only and adverse opinion. Determining which is appropriate depends entirely
upon materiality. An unqualified opinion is appropriate if the GAAP departure is
immaterial (standard unqualified) or if the auditor agrees with the client's departure
from GAAP (unqualified with explanatory paragraph). A qualified opinion is
appropriate when the deviation from GAAP is material but not highly material; the
adverse opinion is appropriate when the deviation is highly material.
3-20 The AICPA has such strict requirements on audit opinions when the auditor is not
independent because it is important that stockholders and other third parties be absolutely
assured that the auditor is unbiased throughout the entire engagement. If users develop
the attitude that auditors are not independent of management, the value of the audit
function will be greatly reduced, if not eliminated. 9-35 3-21 When the auditor discovers more than one condition that requires a departure
from or a modification of a standard unqualified report, the report should be modified for
each condition. An exception is when one condition neutralizes the other condition. An
example would be when the auditor is not independent and there is also a scope
limitation. In this situation the lack of independence overshadows the scope
limitation. Accordingly, the scope limitation should not be mentioned.
3-22 Given the global nature of the financial markets, investors, both in the U.S. and
abroad, are frequently making investments in companies that are located all over the
world. While many companies located outside the U. S. already prepare financial
statements in accordance with International Financial Reporting Standards (IFRS),
financial statements of U.S.-based entities are based on U.S. generally accepted
accounting principles, Differences in the basis of presentation makes the analysis of U.S.
and non-U.S.-based company financial statements difficult. Similarly, differences exist in
auditing standards issued across the globe, so the adoption of International Statements on
Auditing (ISAs) would mean auditors from around the globe are conducting their audits
using the same set of standards. The embrace of IFRS and ISAs will help investors in
their analysis of audited financial statements prepared across the globe. Multiple Choice Questions From CPA Examinations 3-23 a. (2) b. (3) c. (3) 3-24 a. (3) b. (4) c. (1) 3-25 a. (2) b. (3) c. (3) Discussion Questions and Problems 3-26 a.
b. c. d. "Correctly stated" implies absolute accuracy, whereas the alternative report
states that no material misstatements exist.
The reference to generally accepted accounting principles specifies rules
that were followed in accounting for the transactions to date; whereas "the
true economic conditions" does not identify the specific accounting
The opinion paragraph is not intended to be a certification or a
guarantee of the accuracy and correctness of the financial statements, but
rather is intended to be an expression of professional judgment based
upon a reasonable audit of the statements and underlying records.
The name of the CPA firm rather than that of the individual practitioner
should appear on the accountant's report because it is the entire firm that
accepts responsibility for the report issued. 9-36 3-26 (continued)
e. 7 a. "Our audit was performed to detect material misstatements in the financial
statements" is flawed because the purpose of the audit is to determine
whether financial statements are fairly stated, not to specifically search for
material errors and fraud. It also fails to recognize the audit standards
followed by the auditor.
"We conducted our audit in accordance with auditing standards
generally accepted in the United States of America"
identifies the auditor's responsibilities for conduct of the
audit, accumulation of evidence and reporting requirements.
It is a much broader statement than the alternative clause. It
also implies that if the auditor has conducted the audit in
accordance with generally accepted auditing standards but
does not uncover certain material errors or fraud, the auditor
is unlikely to have responsibility for failing to do so. Items that need not be included in the auditor's report are:
b. That Optima is presenting comparative financial statements. (Both
years' statements will be referred to in the audit report.)
Specific description of the change in method of accounting for
long-term construction contracts need not be included in the report
since it is discussed in the footnotes. But, the auditor's report must
state that there is a change in accounting principles and refer to the
The fact that normal receivable confirmation procedures were not...
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- Fall '13