Auditing and Assurance Services, 15e (Arens) Chapter 3 Audit Reports
Learning Objective 3-1 1) An audit of historical financial statements most commonly includes the: A) balance sheet, statement of retained earnings, and the statement of cash flows !) income statement, the statement of cash flows, and the statement of net wor"ing ca#ital $) statement of cash flows, balance sheet, and the statement of retained earnings %) balance sheet, income statement, statement of cash flows, and the statement of changes in stoc"holders& e'uity Answer: % (erms: (erms: Audit of historical historical financial statements %iff: oderate Objective: LO 3-1 AA$*!: +eflective thin"ing thin"ing s"ills s"ills ) Auditing Auditing standards re'uire that the audit re#ort must be titled and that the title must: A) include the word inde#endent !) indicate if the auditor is a $.A $) indicate if the auditor is a #ro#rietorshi#, #artnershi#, or cor#oration %) indicate the ty#e of audit o#inion o# inion issued Answer: A (erms: (erms: Auditing standards re'uire audit re#ort title %iff: /asy Objective: LO 3-1 AA$*!: +eflective thin"ing thin"ing s"ills s"ills
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3) (o em#hasi4e the fact that the auditor is inde#endent, a ty#ical addressee of the audit re#ort could be: A) $om#any $ontroller *hareholders !oard of %irectors 5o 6es 6es 6es 6es !) $om#any $ontroller 5o
*hareholders 5o
!oard of %irectors 6es 6es
$) $om#any $ontroller 6es
*hareholders 6es
!oard of %irectors 5o
%) $om#any $ontroller 6es
*hareholders 5o
!oard of %irectors 5o
Answer: A (erms: Audit re#ort addressee %iff: /asy Objective: LO 3-1 AA$*!: +eflective thin"ing thin"ing s"ills s"ills 2) (he auditor&s res#onsibility section of the standard un'ualified audit re#ort states that the audit is designed to: A) discover all errors and7or irregularities !) discover material errors and7or irregularities $) conform to generally acce#ted accounting acco unting #rinci#les %) obtain reasonable assurance whether the statements are free of material misstatement Answer: % (erms: (erms: *co#e #aragra#h of standard un'ualified audit re#ort states %iff: /asy Objective: LO 3-1 AA$*!: +eflective thin"ing thin"ing s"ills s"ills
3) (o em#hasi4e the fact that the auditor is inde#endent, a ty#ical addressee of the audit re#ort could be: A) $om#any $ontroller *hareholders !oard of %irectors 5o 6es 6es 6es 6es !) $om#any $ontroller 5o
*hareholders 5o
!oard of %irectors 6es 6es
$) $om#any $ontroller 6es
*hareholders 6es
!oard of %irectors 5o
%) $om#any $ontroller 6es
*hareholders 5o
!oard of %irectors 5o
Answer: A (erms: Audit re#ort addressee %iff: /asy Objective: LO 3-1 AA$*!: +eflective thin"ing thin"ing s"ills s"ills 2) (he auditor&s res#onsibility section of the standard un'ualified audit re#ort states that the audit is designed to: A) discover all errors and7or irregularities !) discover material errors and7or irregularities $) conform to generally acce#ted accounting acco unting #rinci#les %) obtain reasonable assurance whether the statements are free of material misstatement Answer: % (erms: (erms: *co#e #aragra#h of standard un'ualified audit re#ort states %iff: /asy Objective: LO 3-1 AA$*!: +eflective thin"ing thin"ing s"ills s"ills
8) (he audit re#ort date on a standard un'ualified re#ort indicates: A) the last day of the fiscal #eriod !) the date on which the financial statements were filed with the *ecurities and /9change $ommission $) the last date on which users may institute a lawsuit against either client or auditor %) the last day of the auditor&s res#onsibility for the review of significant events that occurred after the date of the financial statements Answer: % (erms: (erms: Audit re#ort date on standard un'ualified re#ort %iff: /asy Objective: LO 3-1 AA$*!: +eflective thin"ing thin"ing s"ills s"ills ) (he standard audit re#ort for non-#ublic entities refers to ;AA* and ;AA. in which sections< A) ; A A* ;AA. Audi Audito torr&s res res#o #ons nsiibili bility ty Audit uditor or&s &s res res#o #ons nsiibil bility !) ; A A* Auditor&s res#onsibility
;AA. ntroductory #aragra#h
$) ; A A* ;AA. anagement&s res#onsibility anagement&s res#onsibility and O#inion #aragra#h and ntroductory #aragra#h %) ; A A* Auditor&s res#onsibility
;AA. anagement&s res#onsibility and O#inion #aragra#h
Answer: % (erms: (erms: *tandard un'ualified audit re#ort for non-#ublic entities= ;AA* ;AA* and ;AA. %iff: oderate Objective: LO 3-1 AA$*!: +eflective thin"ing thin"ing s"ills s"ills
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>) ?hich of the following is not e9#licitly stated in the standard un'ualified audit re#ort< A) (he financial statements are the res#onsibility of management !) (he audit was conducted in accordance with generally acce#ted accounting #rinci#les $) (he auditors believe that the audit evidence #rovides a reasonable basis for their o#inion %) An audit includes assessing the accounting estimates used Answer: ! (erms: *tandard un'ualified audit re#ort %iff: /asy Objective: LO 3-1 AA$*!: +eflective thin"ing s"ills @) (he standard un'ualified audit re#ort for a non-#ublic entity must: A) have a re#ort title that includes the word $.A !) be addressed to the com#any&s stoc"holders and creditors $) be dated %) include an e9#lanatory #aragra#h Answer: $ (erms: *tandard un'ualified audit re#ort for a non-#ublic entity=eight #arts of the re#ort %iff: /asy Objective: LO 3-1 AA$*!: +eflective thin"ing s"ills (o#ic: .ublic ) (he management&s res#onsibility section of the standard audit re#ort for a n on-#ublic com#any states that the financial statements are: A) the res#onsibility of the auditor !) the res#onsibility of management $) the joint res#onsibility of management and the auditor %) none of the above Answer: ! (erms: *tandard un'ualified audit re#ort for a non-#ublic entity=eight #arts of the re#ort %iff: /asy Objective: LO 3-1 AA$*!: +eflective thin"ing s"ills
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1) (he introductory #aragra#h of the standard audit re#ort for a non-#ublic com#any #erforms which functions< t states the $.A has #erformed an audit t lists the financial statements being audited t states the financial statements are the res#onsibility of the auditor A) and !) and $) and %) , and Answer: A (erms: ntroductory #aragra#h of standard audit re#ort %iff: oderate Objective: LO 3-1 AA$*!: +eflective thin"ing s"ills 11) ?hich of the following statements are true for the audit re#ort of a non-#ublic entity< (he introductory #aragra#h states that management is res#onsible for the #re#aration and content of the financial statements (he sco#e #aragra#h states that the auditor evaluates the a##ro#riateness of accounting #olicies used and the reasonableness of significant accounting estimates made by management A) only !) only $) and %) 5either nor Answer: ! (erms: ntroductory #aragra#h and sco#e #aragra#h %iff: oderate Objective: LO 3-1 AA$*!: +eflective thin"ing s"ills 1) (he auditor&s res#onsibility section of the standard audit re#ort states that the auditor is: A) res#onsible for the financial statements and the o#inion o n them !) res#onsible for the financial statements $) res#onsible for the o#inion on the financial statements %) jointly res#onsible for the financial statements with management Answer: $ (erms: *tandard un'ualified audit re#ort for a non-#ublic entity=eight #arts of the re#ort %iff: /asy Objective: LO 3-1 AA$*!: +eflective thin"ing s"ills
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13) f the balance sheet of a #rivate com#any is dated %ecember 31, 11, the audit re#ort is dated Bebruary @, 1, and both are released on Bebruary 18, 1, this indicates that the auditor has searched for subse'uent events that occurred u# to: A) %ecember 31, 11 !) Canuary 1, 1 $) Bebruary @, 1 %) Bebruary 18, 1 Answer: $ (erms: Audit re#ort subse'uent event dating %iff: oderate Objective: LO 3-1 AA$*!: +eflective thin"ing s"ills 12) (he a##ro#riate audit re#ort date for a standard non'ualified audit re#ort for a non-#ublic entity should be the: A) date the financial statements are given to the !oard of %irectors !) date of the financial statements $) date the auditor com#leted the auditing #rocedures in the field %) days after the date of the financial statements as re'uired by the */$ Answer: $ (erms: *tandard un'ualified audit re#ort for a non-#ublic entity=eight #arts of the re#ort %iff: oderate Objective: LO 3-1 AA$*!: +eflective thin"ing s"ills 18) ost auditors believe that financial statements are #resented fairly when the statements are in accordance with ;AA., and that it is also necessary to: A) determine that they are not in violation of BA*! statements !) e9amine the substance of transactions and balances for #ossible misinformation $) review the statements using the accounting #rinci#les #romulgated by the */$ %) assure investors that net income re#orted this year will be e9cee ded in the future Answer: ! (erms: Binancial statements are #resented fairly in accordance with ;AA. %iff: $hallenging Objective: LO 3-1 AA$*!: +eflective thin"ing s"ills
1) An audit re#ort #re#ared by ;arrett and !rown, $.As, is #rovided below (he audit for the year ended %ecember 31, 1 was com#leted on arch 1, 13, and the re#ort was issued to Cavlin $or#oration, a #rivate com#any, on arch 13, 13 List any deficiencies in this re#ort %o not rewrite the re#ort ?e have e9amined the accom#anying financial statements of %alton $or#oration as of %ecember 31, 1 (hese financial statements are the res#onsibility of the com#any&s management Management's Responsibility for the Financial Statements:
anagement is res#onsible for the #re#aration and fair #resentation of the financial statements in accordance with generally acce#ted auditing standards= this includes the design, im#lementation, and maintenance of internal control relevant to the #re#aration and fair #resentation of financial statements that are free from all misstatement, whether due to fraud or error Auditor's Responsibility
Our res#onsibility is to give an o#inion on these financial statements based on our audit ?e conducted our audits in accordance with auditing standards generally acce#ted throughout the world(hose standards re'uire that we #lan and #erform the audit to obtain absolute assurance about whether the financial statements are free of misstatement An audit involves #erforming #rocedures to obtain audit evidence about the amounts and disclosures in the financial statements (he #rocedures selected de#end on management&s judgment, including the assessment of the ris"s of material misstatement of the income statement, whether due to fraud or error n ma"ing those ris" assessments, the auditor considers internal control relevant to the auditor&s #re#aration and fair #resentation of the financial statements in order to design audit #rocedures that are a##ro#riate in the circumstances, but not for the #ur#ose of e9#ressing an o#inion on the effectiveness of the entity&s internal control An audit also includes evaluating the a##ro#riateness of accounting #olicies and the accuracy of accounting estimates made by management, as well as evaluating the overall #resentation of the financial statements ?e believe that the audit evidence we have obtained is sufficient and a##ro#riate to #rovide a basis for our audit o#inion Opinion
n our o#inion, the financial statements referred to above #resent accurately the financial #osition of Cavlin $or#oration as of %ecember 31, 1, in conformity with accounting #rinci#les generally acce#ted in the Dnited *tates of America ;arrett and !rown, $.As arch, 13
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Answer: (he audit re#ort contains the following deficiencies: E (he re#ort title is missing (he title must include the word independent. E (he audit re#ort address is missing(he re#ort should be addressed to shareholders and the board of directors E (he introductory #aragra#h should refer to an audit, not an e9amination E (he introductory #aragra#h should list the financial statements that were audited E (he introductory #aragra#h refers to the wrong com#any E (he introductory #aragra#h should not state that the financial statements are the res#onsibility of management (his belongs in the ne9t section- management&s res#onsibility E (he management&s res#onsibility section should state that the financial statements are in accordance with accounting #rinci#les generally acce#ted in the Dnites *tates of America not in accordance with generally acce#ted auditing standards E (he auditor&s res#onsibility section should state that our res#onsibility is to e9#ress an o#inion, not give an o#inion E (he auditor&s res#onsibility section should state the audit was conducted in accordance with auditing standards generally acce#ted in the Dnited *tates of America, not throughout the world E (he auditor&s res#onsibility section should state that the audit was #lanned and #erformed to obtain reasonable assurance, not absolute assurance E (he auditor&s res#onsibility section should state that the financial statements are free of material misstatements, not sim#ly misstatement E (he sco#e #aragra#h of the auditor&s res#onsibility section should state that the #rocedures selected de#end on the auditor&s judgment, not management&s judgment E (he sco#e #aragra#h of the auditor&s res#onsibility section should state ris" of material misstatement in the financial statements, not the income statement E (he sco#e #aragra#h of the auditor&s res#onsibility section should state the auditor considers internal control relevant to management's #re#aration , not the entity's #re#aration E (he sco#e #aragra#h of the auditor&s res#onsibility section is missing the sentence Accordingly, we e9#ress no such o#inion (his should be #laced right after the second sentence E (he sco#e #aragra#h of the auditor&s res#onsibility section should state reasonableness" of significant accounting estimates, not accurate. E (he sco#e #aragra#h should contain the following #hrase: An audit also includes assessing the accounting #rinci#les used and significant estimates made by management, as well as evaluating the overall financial statement #resentation E (he auditor&s o#inion section should state that the financial statements #resent fairly, in all material respects," not #resent accurately E (he auditor&s o#inion section should include and the results of their o#erations and cash flows for the year then ended E (he audit re#ort should be dated arch 1, 13 (erms: Audit re#ort deficiencies %iff: $hallenging Objective: LO 3-1 AA$*!: Analytic s"ills
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1>) %escribe the standard un'ualified re#ort to be issued for an audit of a #rivate com#any !egin by s#ecifying the eight #arts of the re#ort, and then discuss the contents of each #art Answer: (he #arts of the standard un'ualified re#ort are as follows: E Report title (he title must include the word inde#endent /9am#les of a##ro#riate titles are inde#endent auditor&s re#ort, or re#ort of inde#endent accountant E Report address. (he re#ort is usually addressed to the com#any&s stoc"holders or board of directors t should not be addressed to com#any management E ntroductory paragraph (his #aragra#h states that an audit was #erformed to distinguish the re#ort from a com#ilation or review re#ort t also lists the financial statements that were audited, including the notes to the financial statements as well as the balance sheet dates and the accounting #eriods for the income statement and statement of cash flows (he wording of the financial statements in the re#ort should be identical to those used by management on the financial statements E Management's Responsibility section (his section states that the statements are the res#onsibility of management (his res#onsibility includes selecting the a##ro#riate accounting #rinci#les and maintaining internal control over financial re#orting sufficient for #re#aration of financial statements that are free of material misstatements due to fraud or error E Auditor's Responsibility section (his section contains three #aragra#hs: (he first #aragra#h states that F1) the audit was conducted in accordance with auditing standards generally acce#ted in the Dnited *tates of America, F) the audit is designed to obtain reasonable assurance about whether the statements are free of material misstatement (he second #aragra#h is called the sco#e #aragra#h and describes the sco#e of the audit and the evidence accumulated (his #aragra#h indicates that the #rocedures de#end on the auditor&s judgment and includes an assessment of the ris" of material misstatements in the financial statements t also indicates that the auditor considers internal control relevant to the #re#aration and fair #resentation of the financial statements in designing the audit #rocedures #erformed, but this assessment of internal control is not for the #ur#ose and is not sufficient to e9#ress an o#inion on the effectiveness of the entity&s internal control (he last sentence of the #aragra#h indicates that the audit includes evaluating the accounting #olicies selected, the reasonableness of accounting estimates, and the overall financial statement #resentation (he third #aragra#h indicates the auditor believes that sufficient a##ro#riate evidence has been obtained to su##ort the auditor&s o#inion E Opinion paragraph (his #aragra#h states the auditor&s conclusions based on the results of the audit t states that in the auditor&s o#inion the financial statements #resent fairly, in all material res#ects, the financial #osition of the com#any as of a certain date, and the results of their o#erations and cash flows for the the yearFs) then ended, in accordance with accounting #rinci#les generally acce#ted in the Dnited *tates of America
E !ame of #A firm (y#ically, the name of the $.A firm, and not the name of an individual auditor, is used E Audit report date (he audit re#ort is normally dated as of the last day of fieldwor" (erms: *tandard un'ualified audit re#ort for a non-#ublic entity= eight #arts of the re#ort %iff: $hallenging Objective: LO 3-1 AA$*!: +eflective thin"ing s"ills
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1@) /., nc, is a #rivate manufacturing com#any with a calendar year-end (heir financial statements include a balance sheet, a statement of income, statement of cash flows, and statement of stoc"holders& e'uity Bor the most recent audit, Garrington and .erry, LL., audited the 11 and 1 financial statements (he auditors com#leted all significant fieldwor" on arch 8, 13 and issued the audit re#ort on arch 1, 13 Re$uired :
$onsider all the facts given and write the standard un'ualified auditor&s re#ort, including all eight sections of the re#ort Answer: Independent Auditor's Report (o the !oard of %irectors and *hareholders of /., nc ?e have audited the accom#anying balance sheets of /., nc, as of %ecember 31, 1 and 11, and the related statements of income, changes in stoc"holders& e'uity, and cash flows for the years then ended, and the related notes to the financial statements Management's Responsibility for the Financial Statements
anagement is res#onsible for the #re#aration and fair #resentation of the financial statements in accordance with accounting #rinci#les generally acce#ted in the Dnited *tates of America= this includes the design, im#lementation, and maintenance of internal control relevant to the #re#aration and fair #resentation of financial statements that are free from material misstatement, whether due to fraud or error Auditor's Responsibility
Our res#onsibility is to e9#ress an o#inion on these financial statements based on our audits ?e conducted our audits in accordance with auditing standards generally acce#ted in the Dnited *tates of America (hose standards re'uire that we #lan and #erform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement An audit involves #erforming #rocedures to obtain audit evidence about the amounts and disclosures in the financial statements (he #rocedures selected de#end on the auditor&s judgment, including the assessment of the ris"s of material misstatement of the financial statements, whether due to fraud or error n ma"ing those ris" assessments, the auditor considers internal control relevant to the entity&s #re#aration and fair # resentation of the financial statements in order to design audit #rocedures that are a##ro#riate in the circumstances, but not for the #ur#ose of e9#ressing an o#inion on the effectiveness of the entity&s internal control Accordingly, we e9#ress no such o#inion An audit also includes evaluating the a##ro#riateness of accounting #olicies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall #resentation of the financial statements ?e believe that the audit evidence we have obtained is sufficient and a##ro#riate to #rovide a basis for our audit o#inion
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Opinion
n our o#inion, the financial statements referred to above #resent fairly, in all material res#ects, the financial #osition of /., nc, as of %ecember 31, 1 and 11, and the results of their o#erations and cash flows for the years then ended, in accordance with accounting #rinci#les generally acce#ted in the Dnited *tates of America Garrington and .erry, LL. arch 8, 13 (erms: Audit re#ort format for #rivate com#any %iff: $hallenging Objective: LO 3-1 AA$*!: Analytic s"ills 1) An audit #rovides a high level of assurance, but is not a guarantee that a material misstatement will e9ist in the financial statements A) (rue !) Balse Answer: A (erms: Audit and reasonable assurance %iff: oderate Objective: LO 3-1 AA$*!: +eflective thin"ing s"ills ) A$.A auditing standards #rovide uniform wording for the auditor&s re#ort to enable users of the financial statements to understand the audit re#ort A) (rue !) Balse Answer: A (erms: Dniform wording for auditor&s re#ort %iff: /asy Objective: LO 3-1 AA$*!: +eflective thin"ing s"ills 1) Dsers of the financial statements rely on the auditor&s re#ort because of the absolute assurance the re#ort #rovides A) (rue !) Balse Answer: ! (erms: Dsers of financial statements rely on auditor&s re#ort %iff: /asy Objective: LO 3-1 AA$*!: +eflective thin"ing s"ills
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) (he introductory #aragra#h of the auditor&s re#ort states that the auditor is res#onsible for the #re#aration, #resentation and o#inion on financial statements A) (rue !) Balse Answer: ! (erms: ntroductory #aragra#h of auditor&s re#ort %iff: /asy Objective: LO 3-1 AA$*!: +eflective thin"ing s"ills 3) (he audit re#ort date is the date the auditor com#leted audit #rocedures in the field A) (rue !) Balse Answer: A (erms: Audit re#ort date %iff: /asy Objective: LO 3-1 AA$*!: +eflective thin"ing s"ills 2) (he sco#e #aragra#h of the auditor&s res#onsibility section of the audit re#ort issued for financial statements of a non-#ublic com#any should refer to generally acce#ted auditing standards A) (rue !) Balse Answer: A (erms: Audit re#orts issued for financial statements of #rivate com#any= *co#e #aragra#h= ;enerally acce#ted auditing standards %iff: /asy Objective: LO 3-1 AA$*!: +eflective thin"ing s"ills (o#ic: .ublic 8) n the sco#e #aragra#h of the audit re#ort issued for financial statements of a non-#ublic com#any, the auditor e9#resses an o#inion about the internal controls of the com#an y A) (rue !) Balse Answer: ! (erms: Audit re#orts issued for financial statements of #rivate com#any= *co#e #aragra#h= ;enerally acce#ted auditing standards %iff: /asy Objective: LO 3-1 AA$*!: +eflective thin"ing s"ills
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) (he audit re#ort is normally addressed to the com#any&s #resident or chief e9ecutive officer A) (rue !) Balse Answer: ! (erms: Audit re#ort normally addressed %iff: /asy Objective: LO 3-1 AA$*!: +eflective thin"ing s"ills >) (he #hrase generally acce#ted accounting #rinci#les can be found in the o#inion #aragra#h of a standard un'ualified re#ort A) (rue !) Balse Answer: A (erms: ;enerally acce#ted accounting #rinci#les= O#inion #aragra#h of standard un'ualified re#ort %iff: /asy Objective: LO 3-1 AA$*!: +eflective thin"ing s"ills @) (he date of the auditor&s re#ort is indicative of the last day of the auditor&s res#onsibility for the review of significant events occurring after the balance sheet date A) (rue !) Balse Answer: A (erms: %ate of auditor&s re#ort indicates auditor&s res#onsibility %iff: oderate Objective: LO 3-1 AA$*!: +eflective thin"ing s"ills ) (he #hrase auditing standards generally acce#ted in the Dnited *tates of America can be found in the o#inion #aragra#h of a standard, un'ualified audit re#ort for a non-#ublic com#any A) (rue !) Balse Answer: ! (erms: Auditing standards generally acce#ted in the Dnited *tates= O#inion #aragra#h in standard un'ualified re#ort for #ublic com#any %iff: oderate Objective: LO 3-1 AA$*!: +eflective thin"ing s"ills (o#ic: .ublic
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3) (he #hrase (hose standards re'uire that we #lan and #erform the audit to obtain reasonable assurance about whether the financial statements are free from material error is included in the auditor&s o#inion section of an audit re#ort A) (rue !) Balse Answer: ! (erms: *tandard un'ualified audit re#ort for a non-#ublic entity=eight #arts of the re#ort %iff: oderate Objective: LO 3-1 AA$*!: +eflective thin"ing s"ills Learning Objective 3- 1) n which of the following situations would the auditor most li"ely issue an un'ualified re#ort< A) (he client valued ending inventory by using the re#lacement cost method !) (he client valued ending inventory by using the 5e9t-n-Birst-Out F5BO) method $) (he client valued ending inventory at selling #rice rather than historical cost %) (he client valued ending inventory by using the Birst-n-Birst-Out FBBO) method, but showed the re#lacement cost of inventory in the 5otes to the Binancial *tatements Answer: % (erms: ssued audit re#ort= further audit tests or in'uiries %iff: $hallenging Objective: LO 3- AA$*!: +eflective thin"ing s"ills ) (he standard un'ualified audit re#ort: A) is sometimes called a clean o#inion !) can be issued only with an e9#lanatory #aragra#h $) can be issued if only a balance sheet and income statement are included in the financial statements %) is sometimes called a disclaimer re#ort Answer: A (erms: $onditions for standard un'ualified audit re#ort %iff: /asy Objective: LO 3- AA$*!: +eflective thin"ing s"ills
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3) (here are four conditions that must be met before an auditor can issue a standard un'ualified re#ort for the audit of a #rivate com#any .lease discuss each of these five conditions Answer: (he four conditions that justify issuing a standard un'ualified re#ort are: E All statementsHbalance sheet, income statement, statement of changes in stoc"holder&s e'uity, and statement of cash flowsHare included in the financial statements E *ufficient a##ro#riate evidence has been accumulated, and the auditor has conducted the engagement in a manner that enables him or her to conclude that the audit was #erformed in accordance with auditing standards E (he financial statements are #resented in accordance with D* generally acce#ted accounting #rinci#les or other a##ro#riate accounting framewor" (his also means that ade'uate disclosures have been included in the footnotes and other #arts of the financial statements E (here are no circumstances re'uiring the addition of an e9#lanatory #aragra#h or modification of the wording of the re#ort (erms: $onditions for standard un'ualified re#ort for audit of #rivate com#any %iff: oderate Objective: LO 3- AA$*!: +eflective thin"ing s"ills Learning Objective 3-3 1) ?henever an auditor issues an audit re#ort for a #ublic com#any, the auditor can choose to issue a re#ort in which of the following forms< A combined re#ort on financial statements and internal control over financial re#orting *e#arate re#orts on financial statements and internal control over financial re#orting A) only !) only $) /ither or %) 5either nor Answer: $ (erms: $ombined re#ort on financial statements and internal control over financial re#orting %iff: /asy Objective: LO 3-3 AA$*!: +eflective thin"ing s"ills (o#ic: .ublic
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) (he standard un'ualified audit re#ort for #ublic entities includes the following three #aragra#hs: A) introductory, sco#e and management&s res#onsibility !) materiality, sco#e and re#ort $) introductory, sco#e and o#inion %) sco#e, fieldwor" and conclusion Answer: $ (erms: *tandard un'ualified audit re#ort for #ublic entities %iff: /asy Objective: LO 3-3 AA$*!: +eflective thin"ing s"ills (o#ic: .ublic 3) Auditing standards for #ublic com#anies are established by the: A) */$ !) BA*! $) .$AO! %) +* Answer: $ (erms: Audit standards for #ublic com#anies= .$AO! %iff: /asy Objective: LO 3-3 AA$*!: +eflective thin"ing s"ills (o#ic: .ublic 2) *ection 22Fb) of the *arbanes O9ley Act re'uires that the auditor of a #ublic com#any attest to management&s re#ort on the efficiency of internal controls over financial re#orting A) (rue !) Balse Answer: ! (erms: *ection 22Fb) of *arbanes-O9ley Act= nternal controls over financial re#orting %iff: oderate Objective: LO 3-3 AA$*!: +eflective thin"ing s"ills (o#ic: .ublic 8) Auditors of #ublic com#any financial statements must issue se#arate re#orts on internal control over financial re#orting A) (rue !) Balse Answer: ! (erms: Auditors issue se#arate re#orts on internal control %iff: oderate Objective: LO 3-3 AA$*!: +eflective thin"ing s"ills (o#ic: .ublic
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Learning Objective 3-2 1) /9am#les of un'ualified o#inions which contain modified wording Fwithout adding an e9#lanatory #aragra#h) include: A) the use of other auditors !) material uncertainties $) substantial doubt about the audited com#any For the entity) continuing as a going concern %) lac" of consistent a##lication of ;AA. Answer: A (erms: odified un'ualified o#inion %iff: /asy Objective: LO 3-2 AA$*!: +eflective thin"ing s"ills ) A $.A may wish to em#hasi4e s#ecific matters regarding the financial statements even though an un'ualified o#inion will be issued 5ormally, such e9#lanatory information is: A) included in the sco#e #aragra#h !) included in the o#inion #aragra#h $) included in a se#arate #aragra#h in the re#ort %) included in the introductory #aragra#h Answer: $ (erms: Dn'ualified o#inion with em#hasis on s#ecific matters regarding the financial statements %iff: /asy Objective: LO 3-2 AA$*!: +eflective thin"ing s"ills 3) All of the following are causes for the addition of an e9#lanatory # aragra#h under both A$.A and .$AO! standards except for: A) em#hasis of a matter !) re#orts involving other auditors $) lac" of consistent a##lication of generally acce#ted accounting #rinci#les %) auditor agrees with a de#arture from #romulgated accounting #rinci#les Answer: ! (erms: Dn'ualified o#inion with modified wording %iff: /asy Objective: LO 3-2 AA$*!: +eflective thin"ing s"ills
1@
2) (he term e9#lanatory #aragra#h was re#laced in the A$.A auditing standards with: A) going concern #aragra#h !) em#hasis-of-matter #aragra#h $) de#arture from #rinci#les #aragra#h %) consistency #aragra#h Answer: ! (erms: Dn'ualified o#inion with modified wording %iff: /asy Objective: LO 3-2 AA$*!: +eflective thin"ing s"ills 8) ?hich of the following are changes that affect the com#arability of financial statements but not the consistency and therefore, do not have to be included in the auditor&s re#ort< A) /rror corrections not involving #rinci#les !) $hanges in accounting estimates $) Iariations in the format and #resentation of financial information %) All of the above Answer: % (erms: $hanges that affect the com#arability of financial statements %iff: oderate Objective: LO 3-2 AA$*!: +eflective thin"ing s"ills ) ?hich of the following is least li"ely to cause uncertainty abo ut the ability of an entity to continue as a going concern< A) (he entity is suing a com#etitor for a minor #atent infringement !) (he entity has lost a major customer $) (he entity has significant recurring o#erating losses %) (he entity has wor"ing ca#ital deficiencies Answer: A (erms: ;oing concern %iff: oderate Objective: LO 3-2 AA$*!: +eflective thin"ing s"ills
1
>) ?hen there is uncertainty about a com#any&s ability to continue as a going concern, the auditor&s concern is the #ossibility that the client may not be able to continue its o#erations or meet its obligations for a reasonable #eriod of time Bo r this #ur#ose, a reasonable #eriod of time is considered not to e9ceed: A) si9 months from the date of the financial statements !) one year from the date of the financial statements $) si9 months from the date of the audit re#ort %) one year from the date of the audit re#ort Answer: ! (erms: ;oing concern = time #eriod %iff: oderate Objective: LO 3-2 AA$*!: +eflective thin"ing s"ills @) ?hen the auditor concludes that there is substantial doubt about the entity&s ability to continue as a going concern, the a##ro#riate audit re#ort could be: an un'ualified o#inion with an e9#lanatory #aragra#h a disclaimer of o#inion A) only !) only $) or %) 5either nor Answer: $ (erms: Auditor concludes substantial doubt about entity&s ability to continue as going concern %iff: oderate Objective: LO 3-2 AA$*!: +eflective thin"ing s"ills ) ?hen a com#any&s financial statements contain a de#arture from ;AA. with which the auditor concurs, the de#arture should be e9#lained in: A) the sco#e #aragra#h !) an e9#lanatory #aragra#h that a##ears before the o#inion #aragra#h $) the o#inion #aragra#h %) an e9#lanatory #aragra#h after the o#inion #aragra#h Answer: % (erms: Custified %e#arture %iff: oderate Objective: LO 3-2 AA$*!: +eflective thin"ing s"ills
1) ?illiam ;regory, $.A, is the #rinci#al auditor for a multi-national cor#oration Another $.A has e9amined and re#orted on the financial statements of a significant subsidiary of the cor#oration ;regory is satisfied with the inde#endence and #rofessional re#utation of the other auditor, as well as the 'uality of the other auditor&s e9amination ?ith res#ect to his re#ort on the consolidated financial statements, ta"en as a whole, ;regory: A) must not refer to the e9amination of the other auditor !) must refer to the e9amination of the other auditor $) may refer to the e9amination of the other auditor %) must refer to the e9amination of the other auditors along with the #ercentage off consolidated assets and revenue that they audited Answer: $ (erms: +e#orts involving other auditors %iff: oderate Objective: LO 3-2 AA$*!: +eflective thin"ing s"ills 11) A com#any has changed its method of inventory valuation from an unacce#table one to one in conformity with generally acce#ted accounting #rinci#les (he auditor&s re#ort on the financial statements of the year of the change should include: A) no reference to consistency !) a reference to a #rior #eriod adjustment in the o#inion #aragra#h $) an e9#lanatory #aragra#h that justifies the change and e9#lains the im#act of the change on re#orted net income %) an e9#lanatory #aragra#h e9#laining the change Answer: % (erms: $onsistency modifications %iff: oderate Objective: LO 3-2 AA$*!: +eflective thin"ing s"ills 1) ?hich of the following modifications of the auditor&s re#ort does not include an e9#lanatory #aragra#h< A) A 'ualified re#ort is due to a ;AA. de#arture !) (he re#ort includes an em#hasis of a matter $) (here is a very material sco#e limitation %) A #rinci#al auditor acce#ts the wor" of an other auditor Answer: % (erms: *hared o#inions %iff: oderate Objective: LO 3-2 AA$*!: +eflective thin"ing s"ills
1
13) 5o reference is made in the auditor&s re#ort to other auditors who #erform a #ortion of the audit when: (he other auditor audited an immaterial #ortion of the audit (he other auditor is well "nown or closely su#ervised by the #rinci#le auditor (he #rinci#le auditor has thoroughly reviewed the wor" of the other auditor A) and !) and $) and %) , and Answer: % (erms: *hared o#inions %iff: oderate Objective: LO 3-2 AA$*!: +eflective thin"ing s"ills 12) ?hen an auditor is trying to determine how changes can affect consistency and and7or com#arability, he should "ee# in mind that: A) changes that affect com#arability but not consistency re'uire an e9#lanatory #aragra#h !) items that materially affect the com#arability of financial statements re'uires a disclaimer of o#inion $) changes that affect consistency re'uire an e9#lanatory #aragra#h if they are material %) changes that involve either com#arability or consistency only need to be mentioned in the footnotes Answer: $ (erms: *tandard audit re#ort= e9#lanatory #aragra#h= consistency and com#arability %iff: oderate Objective: LO 3-2 AA$*!: +eflective thin"ing s"ills 18) All of the following would re'uire an em#hasis of matter #aragra#h except for: A) the e9istence of material related #arty transactions !) the lac" of auditor inde#endence $) im#ortant events occurring subse'uent to the balance sheet date %) material uncertainties disclosed in the footnotes Answer: ! (erms: Dn'ualified o#inion with em#hasis on s#ecific matters regarding the financial statements %iff: /asy Objective: LO 3-2 AA$*!: Analytic s"ills
1) Dnder A$.A auditing standards, the #rimary auditor issuing the o#inion on the financial statements is called the: A) com#onent auditor !) #rinci#al auditor $) grou# engagement #artner %) majority auditor Answer: $ (erms: +e#orts involving other auditors %iff: /asy Objective: LO 3-2 AA$*!: +eflective thin"ing s"ills 1>) ?hich of the following is false concerning the #rinci#al $.A firm&s alternatives when issuing a re#ort when another $.A firm #erforms #art of the audit< A) ssue a joint re#ort signed by both $.A firms !) a"e no reference to the other $.A firm in the audit re#ort, and issue the standard un'ualified o#inion $) a"e reference to the other auditor in the re#ort by using modified wording Fa shared o#inion or re#ort) %) A 'ualified o#inion or disclaimer, de#ending on materiality, is re'uired if the #rinci#al auditor is not willing to assume any res#onsibility for the wor" of the other auditor Answer: A (erms: *hared o#inions %iff: $hallenging Objective: LO 3-2 AA$*!: +eflective thin"ing s"ills 1@) ?hich of the following re'uires recognition in the auditor&s o#inion as to consistency< A) (he correction of an error in the #rior year&s financial statements resulting from a mathematical mista"e in ca#itali4ing interest !) A change in the estimate of #rovisions for warranty costs $) (he change from the cost method to the e'uity method of accounting for investments in common stoc" %) A change in de#reciation method which has no effect on current year&s financial statements but is certain to affect future years Answer: $ (erms: $onsistency %iff: $hallenging Objective: LO 3-2 AA$*!: +eflective thin"ing s"ills
3
1) ndicate which changes would re'uire an e9#lanatory #aragra#h in the audit re#ort A) $orrection of an error by changing from an accounting #rinci#le that is not generally acce#table to one that is generally acce#table $hange from LBO to BBO 6es 6es !) $orrection of an error by changing from an accounting #rinci#le that is not generally acce#table to one that is generally acce#table 5o
$hange from LBO to BBO 5o
$) $orrection of an error by changing from an accounting #rinci#le that is not generally acce#table to one that is generally acce#table 6es
$hange from LBO to BBO 5o
%) $orrection of an error by changing from an accounting #rinci#le that is not generally acce#table to one that is generally acce#table 5o
$hange from LBO to BBO 6es
Answer: A (erms: $hanges that re'uire e9#lanatory #aragra#h in audit re#ort %iff: oderate Objective: LO 3-2 AA$*!: +eflective thin"ing s"ills
2
) ndicate which changes would re'uire an e9#lanatory #aragra#h in the audit re#ort A) $hange in the estimated life Iariation in the format of the of an asset financial statements 6es 6es !) $hange in the estimated life Iariation in the format of the of an asset financial statements 5o 5o $) $hange in the estimated life Iariation in the format of the of an asset financial statements 6es 5o %) $hange in the estimated life Iariation in the format of the of an asset financial statements 5o 6es Answer: ! (erms: $hanges that re'uire e9#lanatory #aragra#h in audit re#ort %iff: oderate Objective: LO 3-2 AA$*!: +eflective thin"ing s"ills
8
1) ndicate which changes would re'uire an e9#lanatory #aragra#h in the audit re#ort A) (he $.A concludes there is substantial doubt about the entity&s ability to continue as a going concern $hange from BBO to LBO 6es 6es !) (he $.A concludes there is substantial doubt about the entity&s ability to continue as a going concern $hange from BBO to LBO 5o 5o $) (he $.A concludes there is substantial doubt about the entity&s ability to continue as a going concern $hange from BBO to LBO 6es 5o %) (he $.A concludes there is substantial doubt about the entity&s ability to continue as a going concern $hange from BBO to LBO 5o 6es Answer: A (erms: $hanges that would re'uire an e9#lanatory #aragra#h in audit re#ort %iff: oderate Objective: LO 3-2 AA$*!: +eflective thin"ing s"ills
) ndicate which changes would re'uire an e9#lanatory #aragra#h in the audit re#ort A) A de#arture from ;AA. which, due to unusual (he $.A ma"es reference to circumstances, does not the wor" of another auditor to re'uire a 'ualified or adverse indicate shared res#onsibility o#inion in an un'ualified o#inion 6es 6es !) A de#arture from ;AA. which, due to unusual (he $.A ma"es reference to circumstances, does not the wor" of another auditor to re'uire a 'ualified or adverse indicate shared res#onsibility o#inion in an un'ualified o#inion 5o 5o $) A de#arture from ;AA. which, due to unusual (he $.A ma"es reference to circumstances, does not the wor" of another auditor to re'uire a 'ualified or adverse indicate shared res#onsibility o#inion in an un'ualified o#inion 6es 5o %) A de#arture from ;AA. which, due to unusual (he $.A ma"es reference to circumstances, does not the wor" of another auditor to re'uire a 'ualified or adverse indicate shared res#onsibility o#inion in an un'ualified o#inion 5o 6es Answer: $ (erms: $hanges that would re'uire an e9#lanatory #aragra#h in audit re#ort %iff: $hallenging Objective: LO 3-2 AA$*!: +eflective thin"ing s"ills
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3) %iscuss each of the five circumstances when an auditor would issue an un'ualified audit re#ort with an e9#lanatory #aragra#h or modified wording Answer: An un'ualified re#ort with an e9#lanatory #aragra#h or modified wording is a##ro#riate in the following circumstances: E %ac& of consistent application of AA# ?hen the client has not followed generally acce#ted accounting #rinci#les consistently in the current #eriod in relation to the #receding #eriod, an un'ualified o#inion with an e9#lanatory #aragra#h following the o#inion #aragra#h is a##ro#riate E Substantial doubt about continuing as a going concern ?hen an auditor concludes there is substantial doubt about the client&s ability to continue as a going concern, an un'ualified o#inion with an e9#lanatory #aragra#h following the o#inion #aragra#h is a##ro#riate (he auditor also has the o#tion of issuing a disclaimer of o#inion E A departure from AA# (ith (hich the auditor concurs f adherence to ;AA. would result in misleading financial statements, an un'ualified o#inion with an e 9#lanatory #aragra#h is a##ro#riate E )mphasis of a matter f the auditor wants to em#hasi4e s#ecific matters in the audit re#ort, an e9#lanatory #aragra#h discussing those matters may be added to an un'ualified re#ort E Reports in*ol*ing other auditors ?hen an auditor relies u#on a different $.A firm to #erform #art of the audit, the auditor can indicate that res#onsibility for the audit is shared with another $.A firm by modifying the wording of an un'ualified re#ort (erms: $ircumstances where an auditor will issue modified un'ualified re#ort with e9#lanatory #aragra#h or modified wording %iff: oderate Objective: LO 3-2 AA$*!: +eflective thin"ing s"ills 2) A modified un'ualified audit re#ort arises when the auditor believes the financials are fairly stated but also believes additional information should be #rovided A) (rue !) Balse Answer: A (erms: odified un'ualified audit re#ort %iff: /asy Objective: LO 3-2 AA$*!: +eflective thin"ing s"ills 8) $hanges in accounting estimates re'uires the auditor to issue a modified un'ualified audit re#ort with a consistency #aragra#h inserted after the o#inion #aragra#h A) (rue !) Balse Answer: ! (erms: $hanges of accounting estimates= odified un'ualified audit re#ort %iff: oderate Objective: LO 3-2 AA$*!: +eflective thin"ing s"ills
@
) (he only modified un'ualified o#inion that does not include an e9#lanatory #aragra#h is when other auditors are involved n this case only the introductory #aragra#h is modified A) (rue !) Balse Answer: ! (erms: odified un'ualified o#inion %iff: oderate Objective: LO 3-2 AA$*!: +eflective thin"ing s"ills >) tems that materially affect the com#arability of the financial statements generally re'uire disclosure in the footnotes A) (rue !) Balse Answer: A (erms: tems that materially affect com#arability of financial statements %iff: oderate Objective: LO 3-2 AA$*!: +eflective thin"ing s"ills @) $hanges in an estimate, such as a change in the estimated useful life of an asset for de#reciation #ur#oses, affect consistency but not com#arability, and therefore re'uire an e9#lanatory #aragra#h in the audit re#ort A) (rue !) Balse Answer: ! (erms: $om#arability vs consistency %iff: oderate Objective: LO 3-2 AA$*!: +eflective thin"ing s"ills ) $hanges in re#orting entities, such as the inclusion of an additional com#any in combined financial statements, affect com#arability but not consistency, and therefore do not re'uire an e9#lanatory #aragra#h in the audit re#ort A) (rue !) Balse Answer: ! (erms: $om#arability and consistency %iff: $hallenging Objective: LO 3-2 AA$*!: +eflective thin"ing s"ills
3) ?hen an auditor relies u#on a different $.A firm to #erform #art of the audit and chooses to issue a shared o#inion, only the auditor&s res#onsibility #aragra#h should be modified A) (rue !) Balse Answer: ! (erms: Auditor reliance on different $.A firm to #erform #art of audit= *hared o#inion %iff: oderate Objective: LO 3-2 AA$*!: +eflective thin"ing s"ills 31) ?hen other auditors are involved in the audit and they 'ualify their #ortion of the audit, the #rinci#al auditor must decide if the amount in 'uestion is material to the financial statements as a whole A) (rue !) Balse Answer: A (erms: *hared res#onsibility %iff: $hallenging Objective: LO 3-2 AA$*!: +eflective thin"ing s"ills Learning Objective 3-8 1) As a result of management&s refusal to #ermit the auditor to #hysically e9amine inventory, the auditor must de#art from the un'ualified audit re#ort because: A) the financial statements have not been #re#ared in accordance with ;AA. !) the sco#e of the audit has been restricted by circumstances beyond either the client&s or auditor&s control $) the financial statements have not been audited in accordance with ;AA* %) the sco#e of the audit has been restricted Answer: % (erms: Auditor must de#art from un'ualified audit re#ort= anagement refusal to #ermit the auditor to #hysically e9amine inventory %iff: /asy Objective: LO 3-8 AA$*!: +eflective thin"ing s"ills
3
) An adverse o#inion is issued when the auditor believes: A) some #arts of the financial statements are materially misstated or misleading !) the financial statements would be found to be materially misstated if an investigation were #erformed $) the auditor is not inde#endent %) the overall financial statements are so materially misstated that they do not #resent fairly the financial #osition or results of o#erations and cash flows in conformity with ;AA. Answer: % (erms: Adverse o#inion %iff: /asy Objective: LO 3-8 AA$*!: +eflective thin"ing s"ills 3) An auditor can e9#ress a 'ualified o#inion due to a: A) %e#arture from Lac" of *ufficient ;AA. Lac" of $onsistency /vidence 6es 5o 5o !) %e#arture from ;AA. 5o
Lac" of $onsistency 6es
Lac" of *ufficient /vidence 5o
Lac" of $onsistency 5o
Lac" of *ufficient /vidence 6es
Lac" of $onsistency 6es
Lac" of *ufficient /vidence 6es
$) %e#arture from ;AA. 6es %) %e#arture from ;AA. 6es
Answer: $ (erms: Jualified o#inions %iff: /asy Objective: LO 3-8 AA$*!: +eflective thin"ing s"ills
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2) An auditor determines the financial statements include at least a material de#arture from ;AA. ?hich ty#e of o#inion may be issued< A) %isclaimer Jualified Adverse 6es 5o 5o !) %isclaimer 5o
Jualified 6es
Adverse 5o
%isclaimer 6es
Jualified 5o
Adverse 6es
%isclaimer 5o
Jualified 6es
Adverse 6es
$)
%)
Answer: % (erms: O#inion , ;AA. de#arture %iff: oderate Objective: LO 3-8 AA$*!: +eflective thin"ing s"ills 8) A 'ualified o#inion can be issued for which of the following< ?hen a limitation on the sco#e of the audit has occurred ?hen the auditor lac"s inde#endence ?hen generally acce#ted accounting #rinci#les have not been used A) and !) and $) and %) , and Answer: ! (erms: Jualified o#inion %iff: oderate Objective: LO 3-8 AA$*!: +eflective thin"ing s"ills
3
) n which situation would the auditor be choosing between e9ce#t for 'ualified o#inion and an adverse o#inion< A) (he auditor lac"s inde#endence !) A client-im#osed sco#e limitation $) A circumstance im#osed sco#e limitation %) Lac" of full disclosure within the footnotes Answer: % (erms: Jualified o#inion and adverse o#inion %iff: oderate Objective: LO 3-8 AA$*!: +eflective thin"ing s"ills >) ?hen the auditor determines that the financial statements are fairly stated, but there is a noninde#endent relationshi# between the auditor and the client, the auditor should issue: A) an adverse o#inion !) a disclaimer of o#inion $) either a 'ualified o#inion or an adverse o#inion %) either a 'ualified o#inion or an un'ualified o#inion with modified wording Answer: ! (erms: Audit re#ort when auditor not inde#endent %iff: oderate Objective: LO 3-8 AA$*!: +eflective thin"ing s"ills @) f the auditor lac"s inde#endence, a disclaimer of o#inion must be issued: A) if the client re'uests it !) only if it is highly material $) only if it is material but not #ervasive %) in all cases Answer: % (erms: %isclaimer when auditor lac"s inde#endence %iff: oderate Objective: LO 3-8 AA$*!: +eflective thin"ing s"ills ) f the #hrase e9ce#t for is #resent in the o#inion #aragra#h of the audit re#ort, the auditor has issued aFn): A) adverse o#inion !) disclaimer of o#inion $) un'ualified o#inion %) 'ualified o#inion Answer: % (erms: %e#arture from un'ualified audit re#ort %iff: oderate Objective: LO 3-8 AA$*!: +eflective thin"ing s"ills
33
1) A client has changed their method of valuing inventory from BBO to LBO and the change has a material effect on the financial statements f the auditor does not concur with the a##ro#riateness of the change, the auditor should issue aFn): A) disclaimer !) adverse o#inion $) un'ualified o#inion %) 'ualified o#inion Answer: % (erms: $hange in valuing inventory and auditor does not concur with change %iff: oderate Objective: LO 3-8 AA$*!: +eflective thin"ing s"ills 11) tems that materially affect the com#arability of financial statements generally re'uire disclosure in the footnotes f the client refuses to #ro#erly disclose the item, the auditor will most li"ely issue: A) a disclaimer !) an un'ualified o#inion $) a 'ualified o#inion %) an adverse o#inion Answer: $ (erms: %isclosure and com#arability %iff: oderate Objective: LO 3-8 AA$*!: +eflective thin"ing s"ills 1) ?hich of the following scenarios does not result in a 'ualified o#inion< A) A sco#e limitation #revents the auditor from com#leting an im#ortant audit #rocedure !) $ircumstances e9ist that #revent the auditor from conducting a com#lete audit $) (he auditor lac"s inde#endence with res#ect to the audited entity %) An accounting #rinci#le at variance with ;AA. is used Answer: $ (erms: Jualified o#inion %iff: oderate Objective: LO 3-8 AA$*!: +eflective thin"ing s"ills
32
13) ?henever the client im#oses restrictions on the sco#e of the audit, the auditor should be concerned that management may be trying to #revent discovery of misstatements n such cases, the auditor will li"ely issue a: A) disclaimer of o#inion in all cases !) 'ualification of both sco#e and o#inion in all cases $) disclaimer of o#inion whenever materiality is in 'uestion %) 'ualification of both sco#e and o#inion whenever materiality is in 'uestion Answer: $ (erms: $lient im#osed restrictions on sco#e of audit %iff: oderate Objective: LO 3-8 AA$*!: +eflective thin"ing s"ills 12) n which of the following circumstances would an auditor most li"ely e9#ress an adverse o#inion< A) (he $/O refuses to let the auditor have access to the board of director meeting minutes !) (he financial statements are not in conformity with the BA*! statement on loss contingencies $) nformation comes to the auditor&s attention that raises substantial doubt about the ability for the client to continue as a going concern %) (ests of controls show that the internal control structure is so #oor that the auditor has to assess control ris" at the ma9imum Answer: ! (erms: Adverse o#inion circumstances %iff: oderate Objective: LO 3-8 AA$*!: +eflective thin"ing s"ills 18) ?hich of the following statements is true< (he auditor is re'uired to issue a disclaimer of o#inion in the event of a material uncertainty (he auditor is re'uired to issue a disclaimer of o#inion in the event of a going concern #roblem A) only !) only $) and %) 5either nor Answer: % (erms: %isclaimer of o#inion %iff: $hallenging Objective: LO 3-8 AA$*!: +eflective thin"ing s"ills
38
1) (he most common case in which conditions beyond the client&s and auditor&s control cause a sco#e restriction in an engagement is when the: A) auditor is not a##ointed until after the client&s year-end !) client won&t allow the auditor to confirm receivables for fear of offending its customers $) auditor doesn&t have enough staff to satisfactorily audit all of the client&s foreign subsidiaries %) client is going through $ha#ter 11 ban"ru#tcy Answer: A (erms: *co#e restriction beyond client and auditor control %iff: $hallenging Objective: LO 3-8 AA$*!: +eflective thin"ing s"ills 1>) ?hen the client fails to ma"e ade'uate disclosure in the body of the statements or in the related footnotes, it is the res#onsibility of the auditor to: A) inform the reader that disclosure is not ade'uate, and to issue an adverse o#inion !) inform the reader that disclosure is not ade'uate, and to issue a 'ualified o#inion $) #resent the information in the audit re#ort and issue an un'ualified or 'ualified o#inion %) #resent the information in the audit re#ort and to issue a 'ualified or an adverse o#inion Answer: % (erms: nade'uate disclosure %iff: $hallenging Objective: LO 3-8 AA$*!: +eflective thin"ing s"ills 1@) (here are three conditions necessitating a de#arture from an un'ualified audit re#ort 5ame, discuss and state the a##ro#riate audit re#ort for each of these three conditions Answer: (he three conditions re'uiring a de#arture from an un'ualified re#ort are: E *co#e +estrictions A sco#e restriction can be im#osed by the client or due to circumstances beyond the auditor&s or client&s control n either case the sco#e restriction #revents the auditor from accumulating sufficient evidence to reach a conclusion regarding whether financial statements are stated in accordance with ;AA. (he ty#e of o#inion, de#ending u#on materiality, would be either a 'ualified or a disclaimer of o#inion re#ort E ;AA. %e#artures n this situation the financial statements are not #re#ared in accordance with ;AA. Accordingly, the auditor would issue a 'ualified o#inion if the ;AA. violation were moderately material, or an adverse o#inion if the ;AA. violation were highly material E Auditor lac"s inde#endence nde#endence is ordinarily determined by +ule 11 of the rules of the $ode of .rofessional $onduct ?hen the auditor is not inde#endent, the only re#ort the auditor can issue is a disclaimer of o#inion (erms: $onditions necessitating a de#arture from an un'ualified audit re#ort %iff: oderate Objective: LO 3-8 AA$*!: +eflective thin"ing s"ills
3
1) A 'ualified audit re#ort is issued when all auditing conditions have been met, no significant misstatements have been discovered, and it is the auditor&s o#inion that the financial statements are fairly stated in accordance with ;AA. A) (rue !) Balse Answer: ! (erms: Jualified re#ort %iff: /asy Objective: LO 3-8 AA$*!: +eflective thin"ing s"ills ) Auditors should issue a disclaimer of o#inion when there is a highly material client-im#osed sco#e restriction A) (rue !) Balse Answer: A (erms: %isclaimer of o#inion= $lient-im#osed sco#e restriction %iff: oderate Objective: LO 3-8 AA$*!: +eflective thin"ing s"ills 1) ?henever an auditor issues a 'ualified re#ort, he or she must use the term e9ce#t for in the o#inion #aragra#h A) (rue !) Balse Answer: A (erms: Jualified re#ort= /9ce#t for in o#inion #aragra#h %iff: oderate Objective: LO 3-8 AA$*!: +eflective thin"ing s"ills ) A 'ualified re#ort can ta"e the form of a 'ualification of both the sco#e and the o#inion or of the o#inion alone A) (rue !) Balse Answer: A (erms: Jualified re#ort= *co#e limitation %iff: oderate Objective: LO 3-8 AA$*!: +eflective thin"ing s"ills
3>
3) ?hen an auditor discovers a highly material ;AA. violation in the financial statements and the client refuses to correct it, the auditor should issue a disclaimer of o#inion A) (rue !) Balse Answer: ! (erms: %isclaimer of o#inion= Gighly material ;AA. violation in the financial statements and client refuses to correct it %iff: oderate Objective: LO 3-8 AA$*!: +eflective thin"ing s"ills 2) $lient im#osed restrictions on the audit always re'uire a disclaimer of o #inion A) (rue !) Balse Answer: ! (erms: %isclaimer of o#inion= $lient im#osed restrictions on audit %iff: oderate Objective: LO 3-8 AA$*!: +eflective thin"ing s"ills 8) An auditor should issue a 'ualified o#inion with an e9#lanatory #aragra#h whenever there is a material uncertainty affecting the financial statements A) (rue !) Balse Answer: ! (erms: Jualified o#inion with e9#lanatory #aragra#h %iff: oderate Objective: LO 3-8 AA$*!: +eflective thin"ing s"ills Learning Objective 3- 1) A misstatement in the financial statements can be considered material if "nowledge of the misstatement will affect a decision of: A) the .$AO! !) a reasonable user of the financial statements $) an accountant %) the */$ Answer: ! (erms: ateriality %iff: oderate Objective: LO 3- AA$*!: +eflective thin"ing s"ills
3@
) isstatements must be com#ared with some measurement base before a decision can be made about materiality A commonly acce#ted measurement base includes: A) net income !) total assets $) wor"ing ca#ital %) all of the above Answer: % (erms: (erms: isstatements and materiality %iff: oderate Objective: LO 3- AA$*!: +eflective thin"ing thin"ing s"ills s"ills 3) ?hen com#aring misstatements with a measurement base, the auditor must consider the #ervasiveness of the misstatement Of the following following e9am#les, the most #ervasive misstatement is aFn): A) understatement of inventory !) understatement of retained earnings caused by a miscalculation of dividends #ayable $) misclassification of notes #ayable as a long-term liability when it should be c urrent %) misclassification of salary e9#ense as a selling e9#ense Answer: A (erms: (erms: .ervasive misstatements %iff: oderate Objective: LO 3- AA$*!: +eflective thin"ing thin"ing s"ills s"ills 2) (he dollar amount of some misstatements cannot be accurately measured Bor e9am#le, if the client were unwilling to disclose an e9isting lawsuit, the auditor must estimate the li"ely effect on: A) net income !) users of the financial statements $) the auditor&s e9#osure to lawsuits %) management&s future decisions Answer: ! (erms: (erms: isstatements accurately measured %iff: oderate Objective: LO 3- AA$*!: +eflective thin"ing thin"ing s"ills s"ills
3
8) f most or all users& decisions that are based on the financial statements are li"ely to be significantly affected, the materiality level is: A) unrestricted !) material $) #ervasive %) ris"y Answer: $ (erms: (erms: ateriality 'ualifications %iff: oderate Objective: LO 3- AA$*!: +eflective thin"ing thin"ing s"ills s"ills ) ?hen a client fails to follow ;AA., the audit re#ort can be un'ualified, 'ualified, or adverse de#ending on the materiality ?hat ?hat factors affect materiality that an auditor should consider< A) (he dollar amount in com#arison to a base b ase !) f the misstatement can be measured $) (he nature of the item %) All the above are factors an auditor should consider regarding materiality Answer: % (erms: (erms: $lient fails to follow ;AA.= ateriality ateriality %iff: oderate Objective: LO 3- AA$*!: +eflective thin"ing thin"ing s"ills s"ills >) ?hich of the following is a correct statement regarding materiality< A) (here are well-defined guidelines that enable auditors to determine if something is material !) isstatements must be com#ared with some benchmar" before a decision can be made about the materiality level of the failure of a com#any to follow ;AA. $) .ervasiveness is not considered when com#aring #otential misstatements with a base or benchmar" %) (o evaluate overall materiality, materiality, the auditor does not combine all unadjusted misstatements Answer: ! (erms: ateriality %iff: oderate Objective: LO 3- AA$*!: +eflective thin"ing thin"ing s"ills s"ills
2
@) %iscuss how materiality affects audit re#orting decisions Answer: ?hen determining the a##ro#riate a##ro#riate audit re#ort to issue, issue, the auditor considers three three levels of materiality for a given condition (hese three levels are F1) immaterial, F) material without overshadowing the financial statements as a whole, and F3) so material and so #ervasive that overall fairness of the statements is in 'uestion Bor conditions involving a ;AA. violation, the materiality level of the violation influences whether an un'ualified, 'ualified, or adverse o#inion is issued Bor conditions involving a sco#e restriction, the materiality of the restriction influences whether an un'ualified re#ort, a 'ualified 'u alified sco#e and o#inion re#ort, or a disclaimer of o#inion is issued (erms: (erms: ateriality affect affect on audit re#orting decisions decisions %iff: /asy Objective: LO 3- AA$*!: +eflective thin"ing thin"ing s"ills s"ills ) ateriality is essential when an auditor considers his7her determination of the a##ro#riate re#ort for a given set of circumstances A) (rue !) Balse Answer: A (erms: (erms: ateriality= A##ro#riate re#ort %iff: /asy Objective: LO 3- AA$*!: +eflective thin"ing thin"ing s"ills s"ills 1) A #ervasive e9ce#tion is one that affects different #arts of the financial statements A) (rue !) Balse Answer: A (erms: (erms: .ervasive e9ce#tion %iff: /asy Objective: LO 3- AA$*!: +eflective thin"ing thin"ing s"ills s"ills 11) An An item with a #sychic effect Feg, where the item maintains an increasing earnings trend) is a 'ualitative factor that may affect the auditors decision regarding materiality A) (rue !) Balse Answer: A (erms: (erms: .sychic effect= effect= ateriality ateriality %iff: $hallenging Objective: LO 3- AA$*!: +eflective thin"ing thin"ing s"ills s"ills
21
Learning Objective 3-> 1) (he e9#lanatory #aragra#h for a 'ualified o#inion would: A) #recede the sco#e #aragra#h !) follow the sco#e #aragra#h $) follow the o#inion #aragra#h %) either #recede or follow the o#inion #aragra#h de#ending on the materiality Answer: ! (erms: /9#lanatory #aragra#h for 'ualified o#inion %iff: /asy Objective: LO 3-> AA$*!: +eflective thin"ing s"ills ) An auditor who issues a 'ualified o#inion because sufficient a##ro#riate evidence was not obtained should describe the limitations in an e9#lanatory #aragra#h (he auditor should also modify the: A) 5otes to the financial *co#e #aragra#h O#inion #aragra#h statements 6es 5o 6es !) *co#e #aragra#h 5o
5otes to the financial O#inion #aragra#h statements 6es 6es
*co#e #aragra#h 5o
5otes to the financial O#inion #aragra#h statements 6es 5o
*co#e #aragra#h 6es
5otes to the financial O#inion #aragra#h statements 6es 5o
$)
%)
Answer: % (erms: Jualified o#inion insufficient evidence %iff: $hallenging Objective: LO 3-> AA$*!: +eflective thin"ing s"ills
2
3) ?hen an auditor issues a 'ualified re#ort due to a sco#e limitation an e9#lanatory #aragra#h is normally added ?hich, if any, of the following #aragra#hs are also modified< A) ntroductory *co#e O#inion 6es 6es 6es !) ntroductory 6es
*co#e 6es
O#inion 5o
ntroductory 5o
*co#e 6es
O#inion 5o
ntroductory 5o
*co#e 6es
O#inion 6es
$)
%)
Answer: % (erms: Jualified re#ort due to sco#e restriction= .aragra#hs modified %iff: oderate Objective: LO 3-> AA$*!: +eflective thin"ing s"ills 2) ?hen a 'ualified or adverse o#inion is issued, the 'ualifying #aragra#h is inserted: A) between the introductory and sco#e #aragra#hs !) between the sco#e and o#inion #aragra#hs $) after the o#inion #aragra#h, as a fourth #aragra#h %) immediately after the address, as the first #aragra#h Answer: ! (erms: Jualified or adverse o#inion #aragra#h #lacement %iff: oderate Objective: LO 3-> AA$*!: +eflective thin"ing s"ills
23
8) (he inde#endent auditor must issue a 'ualified o#inion when which of the financialFs) are missing< !alance *heet ncome *tatement *tatement of $ash Blows A) only !) only $) only %) , , and Answer: $ (erms: Jualified o#inion issued when which financial statement is missing %iff: oderate Objective: LO 3-> AA$*!: +eflective thin"ing s"ills ) f the financial statements include an income statement and a balance sheet but e9clude the statement of cash flows, the auditors: A) can issue an un'ualified re#ort !) should issue a 'ualified o#inion due to the de#arture from ;AA. $) should issue a 'ualified o#inion because the missing statement of cash flows constitutes a sco#e limitation %) should include the statement of cash flows, modify the re#ort and issue an un'ualified o#inion Answer: ! (erms: +e#ort when financial statements e9clude statement of cash flows %iff: $hallenging Objective: LO 3-> AA$*!: +eflective thin"ing s"ills >) ?hich of the following is incorrect concerning sco#e limitations< A) f client im#osed, the auditor should be concerned about the client trying to #revent discovery of a material misstatement !) An un'ualified o#inion can result if auditors can #erform alternative #rocedures and are satisfied that the information is fairly stated $) (he most common circumstance im#osed sco#e restriction is due to the client changing their auditors %) (he most common circumstance im#osed sco#e limitation is when the auditor is a##ointed after the balance sheet date Answer: $ (erms: *co#e limitation %iff: oderate Objective: LO 3-> AA$*!: +eflective thin"ing s"ills
22
@) ?hen dealing with materiality and sco#e limitation conditions: A) a disclaimer of o#inion must be issued !) it is easier to evaluate the materiality of #otential misstatements resulting from a sco#e limitation than for failure to follow ;AA. $) sco#e limitations im#osed by the client are always considered material %) a un'ualified o#inion may still be issued de#ending on the materiality of the sco#e limitation Answer: % (erms: *co#e limitation %iff: oderate Objective: LO 3-> AA$*!: +eflective thin"ing s"ills ) ?hen a #ervasive sco#e limitation e9ists: A) a disclaimer of o#inion rather than a 'ualified o#inion is generally re'uired !) the auditor&s res#onsibility #aragra#h is modified to indicate that the auditor was not able to obtain sufficient a##ro#riate evidence to e9#ress an audit o#inion $) sections of the auditor&s res#onsibility #aragra#h are eliminated to avoid stating anything that might lead readers to believe that other #arts of the financial statements might be fairly stated %) all of the above Answer: % (erms: .ervasive sco#e limitation %iff: oderate Objective: LO 3-> AA$*!: +eflective thin"ing s"ills 1) ?hen there is a sco#e restriction, what ty#e of audit re#ort can be issued< A) Dn'ualified o#inion !) Jualification of sco#e and o#inion $) %isclaimer of o#inion %) Any of the above Answer: % (erms: Audit re#orts in various situations %iff: oderate Objective: LO 3-> AA$*!: +eflective thin"ing s"ills
28
11) *ubse'uent to the close of *#acely *#roc"ets fiscal year ending October 31, 1, a major debtor has declared ban"ru#tcy due to a series of events (he receivable is significantly material in relation to the financial statements, and recovery is doubtful (he debtor had confirmed the full amount due to *#acely *#roc"et at the balance sheet date !ecause the account was confirmed at the balance sheet date, *#acely refuses to disclose any information in relation to this subse'uent event (he $.A believes that all other accounts were stated fairly at the balance sheet date n addition, *#acely changed their method of inventory valuation from BBO to LBO (his change was disclosed in 5ote K to the financial statements Accordingly, what ty#e of o#inion should be e9#ressed< A) Dn'ualified with an e9#lanatory #aragra#h !) Jualified due to a ;AA. de#arture $) Jualified due to a sco#e limitation %) A combination of ! and $ Answer: ! (erms: Audit re#ort when client has subse'uent event and change in inventory valuation %iff: $hallenging Objective: LO 3-> AA$*!: +eflective thin"ing s"ills 1) Bor the re#ort containing a disclaimer for lac" of inde#endence, the disclaimer is in the: A) second or sco#e #aragra#h !) third or o#inion #aragra#h $) first and only #aragra#h %) fourth or e9#lanatory #aragra#h Answer: $ (erms: %isclaimer in which re#ort #aragra#h %iff: $hallenging Objective: LO 3-> AA$*!: +eflective thin"ing s"ills 13) ?hen an adverse o#inion is issued, a sco#e #aragra#h would be: A) 'ualified !) unchanged $) deleted %) e9#anded to identify the additional #rocedures which the auditor #erformed Answer: ! (erms: Adverse o#inion and sco#e #aragra#h %iff: $hallenging Objective: LO 3-> AA$*!: +eflective thin"ing s"ills
2
12) After the balance sheet date but #rior to issuance of the au ditor&s re#ort the auditor learns that the client&s facility in a foreign country has been e9#ro#riated anagement refuses to disclose this information in a financial statement footnote or #resent #ro-forma data as to the effect of the event (he auditor should: A) add a footnote to the financial statements !) disclaim an o#inion due to the client im#osed sco#e limitation $) #rovide the information in the re#ort and modify the o#inion %) issue an un'ualified o#inion but #rovide the information in the auditor re#ort Answer: $ (erms: aterial subse'uent event management refusal to disclose %iff: $hallenging Objective: LO 3-1 and LO 3-> AA$*!: +eflective thin"ing s"ills
2>
18) (he following is a #ortion of an adverse audit re#ort issued for a #ublic com#any F5ote: A se#arate re#ort was issued on the effectiveness of internal control over financial re#orting) Independent Auditor's Report
(o the shareholders of ?allace $or#oration ?e have audited the accom#anying balance sheet of ?allace $or#oration as of %ecember 31, 1, and the related statements of income, retained earnings, and cash flows for the year then ended (hese financial statements are the res#onsibility of the com#any&s managemen t Our res#onsibility is to e9#ress an o#inion on these financial statements based on our audit ?e conducted our audit in accordance with the standards of the .ublic $om#any Accounting Oversight !oard FDnited *tates) (hose standards re'uire that we #lan and #erform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement An audit includes e9amining, on a test basis, evidence su##orting the amounts and disclosures in the financial statements An audit also includes assessing the accounting #rinci#les used and significant estimates made by management, as well as evaluating the overall financial statement #resentation ?e believe that our audit #rovides a reasonable basis for our o#inion (he com#any has e9cluded from #ro#erty and debt in the accom#anying balance sheet certain lease obligations that, in our o#inion, should be ca#itali4ed in order to conform with generally acce#ted accounting #rinci#les f these lease obligations were ca#itali4ed, #ro#erty would be increased by 12,8,, long-term debt by 13,,, and retained earnings by 1,3, as of %ecember 31, 1, and net income and earnings #er share would be increased by 1,3, and 8, res#ectively, for the year then ended Re$uired:
$om#lete the above adverse audit re#ort by #re#aring the o#inion #aragra#h %o not date or sign the re#ort Answer: n our o#inion, because of the significance of the matter discussed in the #receding #aragra#h, the financial statements referred to above do not #resent fairly the financial #osition of ?allace $or#oration as of %ecember 31, 1, or the results of its o#erations and its cash flows for the year then ended (erms: Adverse audit re#ort %iff: $hallenging Objective: LO 3-> AA$*!: Analytic s"ills (o#ic: .ublic
2@
1) (he following is the introductory #aragra#h, and the !asis for Jualified O#inion #aragra#h for Bast (imes $or#oration, a non-#ublic com#any Independent Auditor's Report
(o the shareholders of Bast (imes $or#oration ?e have audited the accom#anying balance sheet of Bast (imes $or#oration as of *e#tember 3, 1, and the related statements of income, retained earnings, and cash flows for the year then ended, and the related notes to the financial statements +asis for ualified Opinion
?e were unable to obtain audited financial statements su##orting the com#any&s investment in a foreign affiliate stated at 1,2,, or its e'uity in earnings of that affiliate of 81,, which is included in net income, as described in 5ote 12 to the financial statements !ecause of the nature of the com#any&s records, we were unable to satisfy ourselves as to the carrying value of the investment or the e'uity in its earnings by means of other auditing #rocedures Re$uired:
.re#are the o#inion #aragra#h for the above audit re#ort %o not date or sign the re#ort Answer: n our o#inion, e9ce#t for the effects of the matter described in the !asis for Jualified O#inion #aragra#h, the financial statements referred to above #resent fairly, in all material res#ects, the financial #osition of Bast (imes $or#oration as of *e#tember 3, 1, and the results of its o#erations and its cash flows for the year then en ded in conformity with accounting #rinci#les generally acce#ted in the Dnited *tates of America (erms: Jualified sco#e and o#inion re#ort %iff: $hallenging Objective: LO 3-> AA$*!: Analytic s"ills (o#ic: .ublic 1>) 6our $.A firm has com#leted the fieldwor" for the 1 audit of *har# $or#oration, a #rivate com#any with an October year-end 6ou were #re#aring to draft a standard, un'ualified audit re#ort when you discovered that the audit manager on the *har# engagement owns 1 shares of *har#&s common stoc" .re#are the a##ro#riate re#ort Answer: ?e are not inde#endent with res#ect to *har# $or#oration, and the accom#anying balance sheet as of October 31, 1, and the related statements of income, retained earnings, and cash flows for the year then ended were not audited by us Accordingly, we do not e9#ress an o#inion on them Note: (here is no re#ort title when the auditor issues a disclaimer due to a lac" of inde#endence
(erms: Audit re#ort with lac" of inde#endence %iff: oderate Objective: LO 3-> AA$*!: +eflective thin"ing s"ills 2
1@) Assume you are the #artner in charge of the 1 audit of !ec"er $or#oration, a #rivate com#any (he audit re#ort has not yet been #re#ared n each inde#endent situation following F1@), indicate the a##ro#riate action Fa-g) to be ta"en (he #ossible actions are as follows: a b c d e f g
ssue a standard un'ualified re#ort Jualify both the sco#e and o#inion #aragra#hs Jualify the o#inion #aragra#h ssue an un'ualified o#inion with an e9#lanatory #aragra#h ssue an un'ualified o#inion with modified wording Fno e9#lanatory #aragra#h) ssue an adverse o#inion %isclaim an o#inion
(he situations are as follows: MMMMMMMM 1 !ec"er $or#oration carries its #ro#erty, #lant, and e'ui#ment accounts at current mar"et values $urrent mar"et values e9ceed historical cost by a highly material amount, and the effects are #ervasive throughout the financial statements MMMMMMMM anagement of !ec"er $or#oration refuses to allow you to observe, or ma"e, any counts of inventory (he recorded boo" value of inventory is highly material MMMMMMMM 3 6ou were unable to confirm accounts receivable with !ec"er&s customers Gowever, because of detailed sales and cash recei#ts records, you were able to #erform reliable alternative audit #rocedures MMMMMMMM 2 One wee" before the end of fieldwor", you discover that the audit manager on the !ec"er engagement owns a material amount of !ec"er&s common stoc" MMMMMMMM 8 6ou relied u#on another $.A firm to #erform #art of the audit Although you were the #rinci#al auditor, the other firm audited a material #ortion of the financial statements 6ou wish to refer to Fbut not name) the other firm in your re#ort MMMMMMMM 6ou have substantial doubt about !ec"er&s ability to continue as a going concern MMMMMMMM > !ec"er $or#oration changed its method of com#uting de#reciation in 1 6ou concur with the change and the change is #ro#erly disclosed in the financial statement footnotes MMMMMMMM @ (en days after the balance sheet date, one of !ec"er&s buildings was destroyed by a fire !ec"er refuses to disclose this information in a footnote to the financial statements, but you believe disclosure is re'uired to conform with ;AA. (he amount of the uninsured loss was material, but not highly material
8
Answer: 1 f g 3 a 2 g 8 e d or g > d @ c (erms: Audit re#orts in various situations %iff: $hallenging Objective: LO 3-1, LO -2, LO 3-8, and LO 3-> AA$*!: Analytic s"ills
81
1) *mith and Cones, $.As, audited the consolidated financial statements of $oncord nc and all but one of its subsidiaries for the year ended *e#tember 3, 1 and are e9#ressing an un'ualified o#inion on the financials #resented as a whole *mith, the engagement #artner, instructed ary, an assistant on the engagement, to draft the auditor&s re#ort on 5ovember 2, 1, the date of fieldwor" com#letion n drafting the re#ort ary considered the following: E n #re#aring its financial statements, $oncord changed its method of accounting for research and develo#ment costs and #ro#erly e9#ensed these amounts anagement described the change in #rinci#le in 5ote 1 to the consolidated financial statements E !all N !rown, $.As, audited the financial statements of !iotherm, nc, a consolidated subsidiary of $oncord for the year ended *e#tember 3, 1 (he subsidiary&s financial statements reflect total assets of and total revenues of of the consolidated totals !all N !rown e9#ressed an un'ualified o#inion and furnished to *mith N Cones a co#y of their auditor re#ort *mith N Cones have decided not to assume res#onsibility for the wor" of !all N !rown insofar as it relates to the e9#ression of an o#inion on the consolidated financial statements ta"en as a whole because of the materiality of !iotherm&s financial statements to the consolidated whole !all N !rown&s re#ort will not be #resented together with that of *mith N Cones E $oncord is the subject of a grand jury investigation into #ossible violations of federal antitrust laws and #ossible related crimes +elated civil class actions are #ending $o ncord&s management has ade'uately disclosed in 5ote 1 to their consolidated financial statements !ecause of the early stage of the investigation, the ultimate outcome of these matters cannot b e determined at this time (herefore, no #rovision for any liability that may result has been recorded E $oncord e9#erienced a net loss in 1 and is currently in default under substantially all of its debt agreements anagement&s #lans in regard to these matters are ade'uately disclosed in 5ote 12 to $oncord&s consolidated financial statements (he financials do not include any adjustments that might result from the outcome of this uncertainty (hese matters rase substantial doubt about $oncord&s ability to continue as a going concern !all reviewed ary&s draft and indicated in his review notes that there were many deficiencies in ary&s %raft (he audit re#ort that ary drafted follows Independent Auditor's Report
?e have audited the consolidated financial statements of $on cord, nc, and subsidiaries as of *e#tember 3, 1, and the related consolidated statements of income, changes in stoc"holders e'uity and cash flows for the year then ended (hese financial statements are the res#onsibility of the $om#any&s management Our res#onsibility is to e9#ress an o#inion on these financial statements based on our audits ?e did not audit the financial statements of !iotherm, nc, a wholly-owned subsidiary, which statements reflect total assets and revenues constituting and res#ectively at *e#tember 3, 1 of the consolidated totals (hose statements were audited by !all N !rown, $.As, whose re#orts have been furnished to us, and our o#inion, insofar as it relates to the amounts included for !iotherm, nc is b ased solely on their re#ort ?e conducted our audit in accordance with generally acce#ted auditing standards (hose 8
standards re'uire that we #lan and #erform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement An audit includes e9amining, on a test basis, evidence su##orting the amounts and disclosures in the financial statements An audit also includes assessing the accounting #rinci#les used, as well as assessing control ris" ?e believe our audits #rovide a reasonable basis for our o#inion n our o#inion, based on our audit and the re#ort of the other auditors, the consolidated financial statements referred to above #resent fairly, in all material res#ects, the financial #osition of $oncord nc, as of *e#tember 3, 1 in conformity with generally acce#ted accounting #rinci#les, e9ce#t for the uncertainty, which is discussed in 5ote 1 to the consolidated financials (he accom#anying consolidated financial statements have been #re#ared assuming that the $om#any will continue in e9istence for a reasonable #eriod of time As discussed in 5ote 12 to the consolidated financial statements, the $om#any suffered a net loss and is currently in default under substantially all of its debt agreements anagement&s #lans in regard to these matters are also described in 5ote 12 (he consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty *mith N Cones, $.As 5ovember 2, 1 +e'uired: (he following items #resent some of the deficiencies in the drafted audit re#ort noted by *mith Bor each deficiency, indicate whether: * *mith&s review note is correct ary&s draft is correct ! !oth *mith&s review note and ary&s draft are incorrect Smith's Review Notes
1 An e9#lanatory #aragra#h is re'uired between the sco#e and o#inion #aragra#hs is re'uired for the change in accounting #rinci#les referring the reader to 5ote 1 (he names of the other auditors do not need to be e9#licitly stated in the introductory #aragra#h Only that other auditors #erformed the audit and #rovided their re#ort 3 (he o#inion #aragra#h should e9tend the auditor&s o#inion beyond financial #osition to include the results of $oncord&s o#erations and flows 2 (he reference to the uncertainty in the o#inion #aragra#h is incom#lete t should describe the nature of the uncertainty as #ertaining to the grand jury investigation into #ossible violations of federal antitrust laws 8 (he e9#lanatory #aragra#h following the o#inion #aragra#h does not include the terms substantial doubt and going concern (hese terms are re'uired to be used in this #aragra#h 83
(he e9#lanatory #aragra#h following the o#inion #aragra#h includes an ina##ro#riate statement that the consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty (his statement is misleading and should be omitted Answer: 1 ! * 3 * 2 ! 8 * (erms: %eficiencies in audit re#orts %iff: $hallenging Objective: LO 3-1, LO 3-2, and LO 3-> AA$*!: Analytic s"ills
82
) n auditing the long-term investments account, Arens, $.A, is unable to obtain audited financial statements for an investee located in a foreign country Levine concludes sufficient a##ro#riate audit evidence regarding this investment cannot be obtained Bor each of the following situations below, identify the a##ro#riate o#inion ty#e and re#ort modification by selecting a choice from the a##ro#riate tables below
*ituation 1 Assume the #otential effect on the financial statements is immaterial Assume the #otential effect on the financial statements is moderate 3 Assume the #otential effect on the financial statements is high
D J A %
O#inion (y#e Dn'ualified Jualified Adverse %isclaimer
O#inion (y#e
ntro
*co#e O#inion
/9#1
*tandard .aragra#h $hoice /9#lanatory .aragra#h O Omit 5one re'uired 5 5o change P nsert before o#inion odify - nsert after o#inion
Answer: *ituation 1 Assume the #otential effect on the financial statements is immaterial Assume the #otential effect on the financial statements is moderate 3 Assume the #otential effect on the financial statements is high
O#inion (y#e
ntro
D
5
5
5
J
5
P
%
O
P
(erms: $ircumstances and re'uired audit re#orts %iff: $hallenging Objective: LO 3-1, LO 3-2, and LO 3-> AA$*!: Analytic s"ills
88
*co#e O#inion
/9#1
1) Audit situations 1 through 1 #resent various inde#endent factual situations an auditor might encounter in conducting an audit List A re#resents the ty#es of o#inions the auditor ordinarily would issue, and List ! re#resents the re#ort modifications Fif any) that would be necessary Bor each situation, select one res#onse from List A and one from List ! *elect, as the best answer for each item, the action the auditor normally would ta"e tems from either list may be selected once, more than once, or not at all Assume the following: E (he auditor is inde#endent E (he auditor #reviously e9#ressed an un'ualified o#inion on the #rior-year financial statements unless otherwise noted E Only single-year Fnot com#arative) statements are #resented for the current year Funless otherwise stated) E (he conditions for an un'ualified o#inion e9ist unless contradicted in the factual scenario E (he conditions stated in the factual scenario are material E 5o re#ort modifications are to be made e9ce#t in res#onse to the factual scenario Bactual *cenario 1 (he financial statements #resent fairly, in all material res#ects, the financial #osition, results of o#erations, and cash flows in conformity with ;AA. n auditing the Long-(erm nvestments account, an auditor is unable to obtain audited B7* for an investee located in a foreign country (he auditor concludes that sufficient com#etent evidential matter regarding this investment cannot be obtained but it is not #ervasive to the financials as a whole 3 %ue to recurring o#erating losses and wor"ing ca#ital deficiencies the auditor has substantial doubt about an entity&s ability to continue as a going concern for a reasonable #eriod of time Gowever, the B7* disclosures are ade'uate 2 (he #rinci#al auditor decides to refer to the wor" of another auditor, who audited a wholly owned subsidiary of the entity and issued an un'ualified o#inion 8 An entity issues B7* that #resent financial #osition and results of o#erations but omits the related statement of cash flows anagement discloses in the notes to the B7* that it does not believe the statement of cash flows to be useful An entity changes its de#reciation method for #roduction e'ui#ment from *L to units of #roduction based on hours of utili4ation (he auditor concurs with the change, although it has a material effect on the com#arability of the entity&s B7* > An entity is a defendant in a lawsuit alleging infringement of certain #atent rights Gowever, management cannot reasonably estimate the ultimate outcome of the litigation (he auditor believes that there is a reasonable #ossibility of a significant material loss, but the lawsuit is ade'uately disclosed in the notes to the B7* @ An entity discloses certain lease obligations in the notes to the B7* (he auditor believes that the failure to ca#itali4e these leases is a de#arture from ;AA. (he entity wishes to show com#arative B7* and include the #rior year Gowever, the #rior year B7* contained a 'ualification due to an ina##ro#riate method of ;AA. Accordingly, management corrected the #rior year ;AA. deficiency and included the u#dated numbers in the com#arative financials for the current year 1 (he entity wishes to show com#arative B7* and include the #rior year Gowever, the #rior year B7* were audited by another auditor who refuses to reissue his o#inion 8
List A O#inion $hoices
A Jualified
! Dn'ualified
$ Adverse
% %isclaimer
/ /ither Jualified or Adverse
B /ither %isclaimer or Adverse
; /ither Jualified or %isclaimer
List ! +e#ort odification $hoices G %escribe the circumstances in an e9#lanatory #aragra#h preceding the o#inion #aragra#h w7o modifying the three standard #aragra#hs %escribe the circumstances in the o#inion #aragra#h w7o adding an e9#lanatory #aragra#h C %escribe the circumstances in an e9#lanatory #aragra#h preceding the o#inion #aragra#h and modify the o#inion #aragra#h Q %escribe the circumstances in an e9#lanatory #aragra#h follo(ing the o#inion #aragra#h and modify the o#inion #aragra#h L %escribe the circumstances in an e9#lanatory #aragra#h preceding the o#inion #aragra#h and modify the sco#e N o#inion #aragra#h %escribe the circumstances in an e9#lanatory #aragra#h follo(ing the o#inion #aragra#h and modify the sco#e N o#inion #aragra#h 5 %escribe the circumstances in the sco#e #aragra#h w7o adding an e9#lanatory #aragra#h O %escribe the circumstances in an e9#lanatory #aragra#h follo(ing the o#inion #aragra#h w7o modifying the three standard #aragra#hs . %escribe the circumstances in the introductory #aragra#h w7o adding an e9#lanatory #aragra#h J %escribe the circumstances in the introductory #aragra#h w7o adding an e9#lanatory #aragra#h, and modify the sco#e N o#inion #aragra#hs + ssue the standard auditor&s re#ort w7o modification * 5one of the above
8>
Answer: 1 !, + A, L 3 !, 2 !, J 8 A, C !, > !, + @ /, C !, G 1 !, + (erms: Audit situations and re'uired re#orts with modifications %iff: $hallenging Objective: LO 3-1, LO 3-2, LO 3-8, and LO 3-> AA$*!: Analytic s"ills ) Binancial statement users are ty#ically more concerned with an un'ualified re#ort with e9#lanatory #aragra#hs than they are with a disclaimer of o#inion A) (rue !) Balse Answer: ! (erms: Binancial statement users= Dn'ualified re#ort with e9#lanatory #aragra#hs= %isclaimer of o#inion %iff: oderate Objective: LO 3-> AA$*!: +eflective thin"ing s"ills 3) A lac" of inde#endence will override any other sco#e limitations and re'uires a disclaimer of o#inion A) (rue !) Balse Answer: A (erms: Lac" of inde#endence= %isclaimer of o#inion %iff: oderate Objective: LO 3-> AA$*!: +eflective thin"ing s"ills 2) ?hen a 'ualified o#inion is issued, an e9#lanatory #aragra#h is added immediately after the o#inion #aragra#h to e9#lain the nature of the 'ualification that affects the o#inion A) (rue !) Balse Answer: ! (erms: Jualified o#inion e9#lanatory #aragra#h and o#inion #aragra#h %iff: oderate Objective: LO 3-> AA$*!: +eflective thin"ing s"ills
8@
8) n the case of a disclaimer due to lac" of inde#endence, the entire sco#e #aragra#h is e9cluded from the re#ort A) (rue !) Balse Answer: A (erms: %isclaimer of o#inion %iff: oderate Objective: LO 3-> AA$*!: +eflective thin"ing s"ills Learning Objective 3-@ 1) ?hen accounting #rinci#les are not consistently a##lied, and the materiality level is immaterial, the auditor will issue aFn): A) un'ualified o#inion !) un'ualified o#inion with an e9#lanatory #aragra#h $) adverse o#inion %) disclaimer o#inion Answer: A (erms: Audit re#ort and different levels of materiality %iff: oderate Objective: LO 3-@ AA$*!: Analytic s"ills ) (he first ste# to be followed when deciding the a##ro#riate audit re#ort in a given set of circumstances is to: A) decide the a##ro#riate ty#e of re#ort for the condition !) write the re#ort $) determine whether any conditions e9ists re'uiring a de#arture from a standard un'ualified re#ort %) decide the materiality for each condition Answer: $ (erms: Auditor&s decision #rocess for audit re#orts %iff: oderate Objective: LO 3-@ AA$*!: +eflective thin"ing s"ills 3) n most audits, the auditor issues a: A) 'ualified audit re#ort !) un'ualified audit re#ort $) sco#e limited audit re#ort %) adverse audit re#ort Answer: ! (erms: *tandard un'ualified audit re#ort %iff: $hallenging Objective: LO 3-@ AA$*!: +eflective thin"ing s"ills 8
2) ore than one modification should be included in the audit re#ort when: A) the auditor is not inde#endent and the auditor "nows that the com#any has not followed generally acce#ted accounting #rinci#les !) there is substantial doubt about the going concern of the com#any and information about the causes of the uncertainties is not ade'uately disclosed in the footnotes $) there is a sco#e limitation and there is substantial doubt about the com#any&s ability to continue as a going concern %) all of the above Answer: % (erms: *tandard re#ort= ore than one condition re'uiring a de#arture or modification %iff: oderate Objective: LO 3-@ AA$*!: +eflective thin"ing s"ills 8) ?hen there is a justified de#arture from ;AA. which is considered material, the auditor should issue aFn): A) standard un'ualified audit re#ort !) disclaimer of o#inion $) un'ualified audit re#ort with an e9#lanatory #aragra#h %) adverse o#inion Answer: $ (erms: Audit re#ort and different levels of materiality %iff: oderate Objective: LO 3-@ AA$*!: +eflective thin"ing s"ills ) f there is a deviation in the statements& #re#aration in accordance with ;AA. and another accounting #rinci#le was a##lied on a basis that was not consistent with that of the #receding year: A) the auditor must choose which modification to include in the audit re#ort !) only the most material modification can be disclosed $) more than one modification should be included in the re#ort %) none of the above Answer: $ (erms: *tandard re#ort= ore than one condition re'uiring a de#arture or modification %iff: oderate Objective: LO 3-@ AA$*!: +eflective thin"ing s"ills
