Disclaimer due to scope restriction a yes b no c yes

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Unformatted text preview: h Flows Yes No No Yes 81. Medium c A CPA would express a qualified opinion with at least four paragraphs for: An unjustified accounting change a. Yes b. No c. Yes d. No 82. Medium d A CPA would express an unqualified opinion with at least four paragraphs for: An unjustified accounting change a. Yes b. No c. Yes d. No 83. Medium b 84. Medium d A justified accounting change, properly accounted for Yes No No Yes A justified accounting change, properly accounted for Yes No No Yes The reasons for expressing a qualified opinion due to a departure from GAAP are expressed in a paragraph a. preceding the scope paragraph. b. following the scope paragraph. c. following the opinion paragraph. d. either preceding or following the opinion paragraph, depending on materiality. In which situation would the auditor be choosing between “except for” qualified opinion and an adverse opinion? a. The auditor lacks independence b. A client-imposed scope restriction c. A circumstance-imposed scope restriction d. Lack of full disclosure required by footnotes Essay Questions 85. easy Discuss how materiality affects audit reporting decisions. Answer: When determining the appropriate audit report to issue, the auditor considers three levels of materiality for a given condition. These three levels are (1) immaterial, (2) material without overshadowing the financial statements as a whole, and (3) highly material. For conditions involving a GAAP violation, the materiality level of the violation influences whether an unqualified, qualified, or adverse opinion is issued. For conditions involving a scope restriction, the materiality of the restriction influences whether an unqualified report, a qualified scope and 1-143 opinion report, or a disclaimer of opinion is issued. 1-144 86. medium There are five conditions that must be met before an auditor can issue a standard unqualified report for the audit of a private company. Please discuss each of these five conditions. Answer: The five conditions that justify issuing a standard unqualified report are: • All statements—balance sheet, income statement, statement of retained earnings, and statement of cash flows—are included in the financial statements. • The three general standards of GAAS have been followed in all respects on the engagement. • Sufficient appropriate audit evidence has been accumulated and the auditor can conclude that the three fieldwork standards have been followed. • The financial statements are presented in accordance with GAAP. • There are no circumstances requiring the addition of an explanatory paragraph or modification of the wording of the report. 87. medium There are three conditions requiring a departure from an unqualified audit report. Discuss each of these three conditions and state the appropriate audit report for each condition. Answer: The three conditions requiring a departure from an unqualified report are: • a scope restriction imposed by the client or by circumstances beyond the auditor’s or client’s control which prevents the auditor from accumulating sufficient evidence to reach a conclusion regarding whether financial statements are stated in accordance with GAAP. In this condition, the auditor would issue either a qualified scope and opinion report, or a disclaimer of opinion. • the financial statements were not prepared in accordance with GAAP. In this condition, the auditor would issue a qualified opinion if the GAAP violation were moderately material, or an adverse opinion if the GAAP violation were highly material. • the auditor is not independent. In this condition, the auditor must issue a disclaimer of opinion. 1-145 88. medium In certain circumstances, an auditor will issue an unqualified report, but the wording will differ from that of a standard unqualified report. Discuss each of the five circumstances when an auditor would issue an unqualified report with an explanatory paragraph or modified wording. Answer: An unqualified report with an explanatory paragraph or modified wording is appropriate in the following circumstances: • Lack of consistent application of GAAP. When the client has not followed generally accepted accounting principles consistently in the current period in relation to the preceding period, an unqualified opinion with an explanatory paragraph following the opinion paragraph is appropriate. • Substantial doubt about continuing as a going concern. When an auditor concludes there is substantial doubt about the client’s ability to continue as a going concern, an unqualified opinion with an explanatory paragraph following the opinion paragraph is appropriate. The auditor also has the option of issuing a disclaimer of opinion. • A departure from GAAP with which the auditor concurs. If adherence to GAAP would result in misleading financial statements, an unqualified opinion with an explanatory paragraph is appropriate. • • 89. medium Emphasis of a matter. If the auditor wants to emphasize specific matters in the audit report, an explanatory paragraph discussing those matters may be added to an unqua...
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