Chapter 17 - Test Bank

Chapter 17 Auditors' Reports

Chapter 17 - Auditors' Reports

Chapter 17

Auditors' Reports

True / False Questions

1.Audit reports should be dated the date on which sufficient appropriate audit evidence has been collected.TrueFalse

2.When the auditors are unable to comply with generally accepted auditing standards, they should issue an opinion that is unmodified, but include an additional emphasis of matter paragraph in the report.TrueFalse

3.When evaluating the results of audit tests, materiality depends upon both the dollar amount and the nature of the item.TrueFalse

4.A public company's financial statements should be prepared following standards of the Public Company Accounting Oversight Board.TrueFalse

5.If financial statements fail to disclose a material fact, the auditors may disclose the information in an emphasis of matter paragraph and, depending upon materiality, issue either a qualified opinion or adverse opinion on the statements.TrueFalse

6.If financial statements contain a material departure from generally accepted accounting principles, the auditors usually should issue a disclaimer of opinion.TrueFalse

7.A change that the auditor agrees with from one generally accepted accounting principle to another generally accepted accounting principle that has a pervasive effect on net income usually results in an adverse opinion by the auditors.TrueFalse

8.When there is a significant question about a company's ability to remain a going concern, the report issued is usually unmodified with an emphasis of matter paragraph.TrueFalse

9.A client imposed scope limitation will generally result in a disclaimer of opinion, regardless of whether sufficient appropriate audit evidence is gathered using alternative procedures.TrueFalse

10.Regulation S-X governs the form and content of financial statements filed with the SEC.TrueFalse

Multiple Choice Questions

11.Which of the following is not explicitly included in an audit report for a nonpublic company?A.A statement that the auditor believes that his or her audit provides a reasonable basis for expressing negative assurance.B.A statement that the auditor's responsibility is to express an opinion on the financial statements.C.A statement that the financial statements are the responsibility of management.D.A title with the word "independent."

12.When an auditor has concluded there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time beyond the current financial statement date (9/30/X1), the auditor's responsibility includes:A.Preparing prospective financial information to verify whether management's plans can be effectively implemented.B.Projecting conditions and events from one year prior to this year's date (9/30/X0) to 9/30/X1.C.Issuing an adverse or negative assurance opinion, depending upon materiality, due to the possible effects on the financial statements.D.Considering the adequacy of disclosure about the entity's possible inability to continue as a going concern.

13.A basis for a modification paragraph in the audit of the financial statements of a nonpublic company:A.Is only included with qualified, adverse or disclaimers of opinion.B.Is presented after the opinion paragraph.C.Has a section title: Emphasis of Matter.D.Must be included in all nonpublic company audit reports.

14.After considering an entity's negative trends and financial difficulties, an auditor has substantial doubt about the entity's ability to continue as a going concern. The auditor's considerations relating to management's plans for dealing with the adverse effects of these conditions most likely would include management's plans to:A.Increase current dividend distributions.B.Reduce existing lines of credit.C.Increase ownership equity.D.Purchase assets formerly leased.

15.When an auditor does not confirm material accounts receivable, but is satisfied by the application of alternative auditing procedures, she normally should:A.Issue an unmodified opinion, but disclose elsewhere in the report this departure from a customary procedure.B.Issue an unmodified opinion with no reference to this omission.C.Issue a qualified opinion or a disclaimer, depending on the materiality of the receivables.D.Issue an adverse opinion.

16.When financial statements are affected by a material departure from generally accepted accounting principles, the auditors should:A.Issue an unmodified opinion with a basis for modification paragraph.B.Withdraw from the engagement.C.Issue an "except for" qualification or an adverse opinion.D.Issue an "except for" qualification or a disclaimer of opinion.

17.When an auditor of financial statements has substantial doubt about an entity's ability to continue as a going concern, the auditor most likely would express a qualified opinion if:A.The effects of the adverse financial conditions are likely to be negative.B.Information about the entity's ability to continue as a going concern is not disclosed in the financial statements.C.Management has no plans to reduce or delay future expenditures.D.Negative trends and recurring operating losses appear to be irreversible.

18.An auditor of financial statements believes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. In evaluating the entity's plans for dealing with the adverse effects of future conditions and events, the auditor most likely would consider, as a mitigating factor, the entity's plans to:A.Repurchase the entity's stock at a price below its book value.B.Issue stock options to key executives.C.Lease rather than purchase operating facilities.D.Accelerate the due date of an existing mortgage.

19.Which of the following procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern?A.Performing cutoff tests of sales transactions with customers with long-standing receivable balances.B.Evaluating the entity's procedures for identifying and recording related party transactions.C.Inspecting title documents to verify whether any real property is pledged as collateral.D.Inquiring of the entity's legal counsel about litigation, claims, and assessments.

20.A scope restriction is least likely to result in a(an):A.Qualified opinion.B.Disclaimer of opinion.C.Adverse opinion.D.Standard unmodified opinion.

21.When a client declines to disclose essential information in the financial statements or notes, the auditor of the financial statements should:A.Provide the information in the audit report, if practicable, and qualify the opinion because of a limitation on the scope of the audit.B.Provide the information in the audit report, if practicable, and qualify the opinion because of a departure from GAAP.C.Issue a disclaimer of opinion because the client has interfered with the auditor's function of assessing the adequacy of disclosure.D.Issue an unmodified opinion, but inform the reader by including the omitted information in the audit report.

22.CPA Firm A has performed most of the audit of Consolidated Company's financial statements and qualifies as the group auditor. CPA Firm B did the remainder of the work. Firm A wishes to assume full responsibility for Firm B's work. Which of the following statements is correct?A.Such assumption of responsibility violates the profession's standards.B.In such circumstances, when appropriate requirements have been met, Firm A should issue a standard unmodified opinion on the financial statements.C.In such circumstances, when appropriate requirements have been met, Firm A should issue an unmodified opinion on the financial statements but should make appropriate reference to Firm B in the audit report.D.CPA firm A should normally qualify its audit report on the basis of the scope limitation involved when another CPA firm is involved.

23.The Rotter Company changed accounting principles in 20X4 from those followed in 20X3. The auditor believes that the new principles are not in conformity with GAAP, and therefore that the 20X4 financial statements are misleading due to pervasive misstatements. The change (including its dollar effect) has been described in the notes to the 20X4 statements, which are being presented by themselves. Under these circumstances, in reporting on the 20X4 financial statements, the auditor should:A.Express an adverse opinion with a basis for modification paragraph disclosing the reason (the accounting change) for the opinion.B.Express an unmodified opinion with an emphasis of matter paragraph and disclose the accounting change from 20X3 and its effect on the financial statements.C.Disclaim an opinion and explain all of the reasons therefore.D.Express an adverse opinion regarding the 20X4 financial statements, without a basis for modification paragraph since the reason therefore since that reason will be included in the notes to the statements.

24.Which of the following accounting changes requires an emphasis of matter paragraph regarding consistency in the auditors' report?A.A change in the estimated useful lives of a class of fixed assets.B.A write-off of a patent because future benefits do not appear to exist.C.A change from the straight line method of depreciation to an accelerated method for a class of fixed assets.D.A change in calculating bad debt expense from one percent to two percent of credit sales.

25.Which of the following is least likely to result in an emphasis of matter paragraph being added to an unmodified auditor's report on the financial statements of a client that sells jewelry through a retail store?A.A decision by the auditor to emphasize that the client is a part of a larger organization.B.Reliance placed upon a specialist to evaluate the diamonds.C.A change from FIFO to specific identification accounting for inventory.D.A question as to whether the client will be able to remain a going concern.

26.A client has changed the salvage values of a number of its fixed assets. The auditors believe that the salvage values are realistic. The appropriate report on the financial statements is:A.Standard unmodified.B.Unmodified with explanatory language as to consistency.C.Qualified for consistency.D.Disclaimer.

27.Which of the following would be most likely to be an appropriate addressee for an audit report?A.The shareholders of the corporation whose financial statements were examined.B.A third party who requested that a copy of the audit report be sent to her.C.The president of the corporation whose financial statements were examined.D.The chief financial officer.

28.The term "except for" in an audit report is:A.Used in an adverse opinion.B.No longer considered appropriate.C.Used in a qualified opinion.D.Used for an unmodified opinion when an emphasis of matter paragraph is added.

29.The unmodified standard audit report of a nonpublic company does not explicitly state that:A.The financial statements are the responsibility of the company's management.B.The audit was conducted in accordance with accounting principles generally accepted in the United States of America.C.The auditors believe that the audit provides a reasonable basis for their opinion.D.An audit includes assessing the accounting principles used.

30.Which of the following is not a difference between the audit report of a nonpublic and public company?A.The public company report includes the word "Registered" in the title.B.The public company report refers to standards of the PCAOB.C.The public company report has an additional paragraph referring to the client's fraud prevention procedures.D.The public company report is shorter.

31.If audited financial statements include a balance sheet and an income statement, but do not include a statement of cash flows:A.The auditors may still issue an unmodified opinion.B.The auditors should issue a qualified report for the departure from generally accepted accounting principles.C.The auditors should issue a qualified report indicating a scope limitation in that no statement of cash flows is presented.D.The auditors should disclaim an opinion on the overall financial statements.

32.Which of the following circumstances generally results in the issuance of a report that includes an opinion that is other than unmodified?A.The auditor is unable to obtain sufficient appropriate audit evidence.B.The group auditors for the engagement are relying on the work of component auditors.C.The financial statements are affected by a change in accounting principle due to a new FASB pronouncement.D.The auditors have decided to emphasize the fact that the company has engaged in material amounts of related party transactions.

33.Which of the following modifications of the auditors' report does not include an additional paragraph?A.The report is qualified because the financial statements contain a material departure from generally accepted accounting principles.B.The report includes an emphasis of a matter.C.The audit report indicates a division of responsibility between two CPA firms.D.The report is qualified because the scope of the auditors' work was limited.

34.If the predecessor auditors do not reissue their audit report on comparative financial statements the successor auditors should:A.Express a qualified opinion on the comparative financial statements audited by the predecessor auditors.B.Reproduce the predecessor auditors' report and include it with the new set of financial statements.C.Have the client omit the comparative financial statements.D.Refer to the report of the predecessor auditors.

35.An audit client has refused to allow the auditors to perform a presumptively mandatory auditing procedure and there are no other effective alternate procedures available. The circumstance would normally result in the issuance of:A.A disclaimer of opinion.B.An adverse opinion.C.A standard unmodified opinion with a qualified scope paragraph.D.An unmodified report with an emphasis of matter paragraph.

36.Which of the following is a "registration statement" that is filed with the SEC by a company planning to issue securities to the public?A.Form 8-K.B.Form S-1.C.Form 10-Q.D.Form 10-K.

37.If group auditors make no reference to component auditors whose work they have relied on as a part of the basis for their report, the group auditors:A.Are not required to investigate the professional reputation of the component auditors.B.Are issuing an inappropriate report.C.Are assuming responsibility for the work of the component auditors.D.Are issuing a qualified opinion.

38.After performing all necessary procedures the predecessor auditors reissue a prior-period report on financial statements at the request of the client without revising the original wording. The predecessor auditors should:A.Delete the date of the report.B.Dual-date the report.C.Use the reissue date.D.Use the date of the previous report.

39.When an adverse opinion is expressed, the opinion paragraph should include a direct reference to:A.A note to the financial statements which discusses the basis for the opinion.B.The Auditor's Responsibility section of the audit report which discusses the basis for the opinion rendered.C.A separate paragraph (section) which discusses the basis for the opinion rendered.D.The consistency in the application of generally accepted accounting principles.

40.It is not appropriate for the auditors' report to refer a reader to a financial statement note for details regarding a(an):A.Change in accounting principle.B.Limitation in the scope of the audit.C.Uncertainty.D.Related party transaction.

41.Under which of the following set of circumstances might the auditors disclaim an opinion?A.The financial statements contain a departure from generally accepted accounting principles, the effect of which is material.B.The group auditors decide to make reference to the report of component auditor who audited a subsidiary.C.There has been a material change between periods in the method of application of accounting principles.D.There are significant scope limitations on the audit.

42.The auditors include an emphasis of matter paragraph in report with an unmodified opinion in order to emphasize that the entity being reported upon is a subsidiary of another business enterprise. The inclusion of this paragraph:A.Is appropriate and would not negate the unmodified opinion.B.Is considered a qualification of the opinion.C.Is a violation of generally accepted reporting standards if this information is disclosed in notes to the financial statements.D.Necessitates a revision of the opinion paragraph to include the phrase "with the foregoing explanation."

43.An emphasis of a matter paragraph ordinarily:A.Relates to a report with a modified opinion.B.Follows the opinion paragraph.C.May either precede or follow the opinion paragraph.D.Is only included in an audit report with an adverse opinion.

44.Which of the following is least likely to result in qualification of the auditors' opinion due to a scope limitation?A.Scope limitations imposed by the client.B.Reliance placed upon the report of component auditors.C.Inability to obtain sufficient appropriate audit evidence.D.Inadequate accounting records.

45.For a continuing audit client, when a complete set of financial statements is presented on a comparative basis for two years, the auditors' opinion would refer to:A.Only the current year under audit.B.Either one or both years at the option of the auditors.C.Each of the two years plus the preceding year.D.Each of the years in the two-year period.

46.Which of the following representations does an auditor make explicitly and which implicitly when issuing an unmodified (unqualified) opinion on public company financial statements?

A.Option AB.Option BC.Option CD.Option D

47.For a particular entity's financial statements to be presented fairly in conformity with generally accepted accounting principles, it is not required that the principles selected:A.Be appropriate in the circumstances for the particular entity.B.Reflect transactions in a manner that presents the financial statements within a range of acceptable limits.C.Present information in the financial statements that is classified and summarized in a reasonable manner.D.Be applied on a basis consistent with those followed in the prior year.

48.In which of the following circumstances will it be most likely that an adverse opinion is considered appropriate?A.The auditor is not independent with respect to the enterprise being audited.B.The statements are not in conformity with generally accepted accounting principles due to a departure from GAAP with an immaterial effect on the financial statements.C.The statements are not in conformity with generally accepted accounting principles regarding pension plans.D.A client-imposed scope limitation prevents the auditor from obtaining sufficient appropriate audit evidence.

49.An independent auditor has concluded that substantial doubt remains about a client's ability to continue as a going concern, but the client's financial statements have properly disclosed all of its solvency problems. The auditor would probably issue a(an):A.Unmodified opinion with an appropriate emphasis of matter paragraph.B."Except for" qualified opinion.C.Standard unmodified opinion.D.Adverse opinion.

50.A basis for modification paragraph is ordinarily placed:A.Within the "Auditor's Responsibility" section of the audit report.B.Preceding the opinion section.C.After the opinion section.D.Based on the auditor's judgment either before or after the opinion section.

51.Doe, an independent auditor, was engaged to perform an audit of the financial statements of Ally Incorporated one month after its fiscal year had ended. Although the inventory count was not observed by Doe, and accounts receivable were not confirmed by direct communication with debtors, Doe was able to obtain sufficient appropriate audit evidence by applying alternative auditing procedures. Doe's audit report will probably contain:A.A standard unmodified opinion.B.An unmodified opinion and an emphasis of matter paragraph.C.Either a qualified opinion or a disclaimer of opinion.D.An "except for" qualification.

52.Which of the following is a general purpose financial reporting framework?A.Generally accepted auditing standards.B.Auditing Standards of the Public Company Accounting Oversight Board.C.International Standards of Auditing.D.International Financial Reporting Standards

53.Morgan, CPA, is the group auditor for a multinational corporation. Another CPA has examined and reported on the financial statements of a significant subsidiary of the corporation. Morgan is satisfied with the independence and professional reputation of the component auditor, as well as the quality of the component auditor's audit. With respect to Morgan's report on the consolidated financial statements, taken as a whole, Morgan:A.Must not refer to the audit of the component auditor.B.Must refer to the audit of the component auditor.C.May refer to the audit of the component auditor.D.May refer to the audit of the component auditor, in which case Morgan must include in the audit report on the consolidated financial statements a qualified opinion with respect to the audit of the component auditor.

54.When reporting on comparative financial statements where the financial statements of the prior period have been examined by a predecessor auditor whose report is not presented, the successor auditor should indicate in the report:A.The reasons why the predecessor auditor's report is not presented.B.The identity of the predecessor auditor who examined the financial statements of the prior year.C.Whether the predecessor auditor's review of the current year's financial statements revealed any matter that might have a material effect on the successor auditor's opinion.D.The type of opinion expressed by the predecessor auditor.

55.If an accounting change has no material effect on the financial statements in the current year, but the change is reasonably certain to have a material effect in later years, the change should be:A.Referred to in the auditor's report for the current year.B.Disclosed in the notes to the financial statements of the current year.C.Disclosed in the notes to the financial statements and referred to in the auditor's report for the current year.D.Treated as a subsequent event.

56.When financial statements of a prior period are presented on a comparative basis with financial statements of the current period, the continuing auditor is responsible for:A.Expressing dual dated opinions.B.Updating the report on the previous financial statements only if there has not been a change in the opinion.C.Updating the report on the previous financial statements only if the previous report was qualified and the reasons for the qualification no longer exist.D.Updating the report on the previous financial statements regardless of the opinion previously issued.

57.An auditor has been asked to report on the balance sheet of Kane Company but not on the other basic financial statements. The auditor will have access to all information underlying the basic financial statements. Under these circumstances, the auditor:A.May accept the engagement.B.May accept the engagement but must disclaim an opinion because of an inability to apply the procedures considered necessary.C.Should refuse the engagement because there is a client-imposed scope limitation.D.Should refuse the engagement because of a departure from generally accepted auditing standards.

58.When the auditor is unable to determine the amounts associated with noncompliance with a law by client personnel due to a scope limitation, the auditor should issue a(an):A.Standard unmodified opinion.B.Disclaimer of opinion.C.Adverse opinion.D.Unmodified opinion with a separate emphasis of matter paragraph.

59.Which of the following will result in emphasis of matter as to consistency in the auditor's report, regardless of whether the item is fully disclosed in the financial statements?A.A change in accounting estimate.B.A change from an unacceptable accounting principle to a generally accepted one.C.Correction of an error not involving a change in accounting principle.D.A change in classification.

60.An auditor's report on comparative financial statements should be dated as of the date of the:A.Issuance of the report.B.Accumulation of sufficient appropriate audit evidence.C.Latest financial statements being reported on.D.Last related-party transaction disclosed in the statements.

61.In which of the following circumstances would an auditor of financial statements be most likely to express an adverse opinion?A.The statements are not in conformity with FASB requirements regarding the capitalization of leases.B.Information comes to the auditor's attention that raises substantial doubt about the entity's ability to continue in existence.C.The chief executive officer refuses the auditor access to minutes of board of directors' meetings.D.Tests of controls show that the entity's internal control is so poor that it can not be relied upon.

Essay Questions

62.Use the accompanying solution sheet to reply to the eight situations below that relate to the audit of financial statements of nonpublic companies. Unless indicated otherwise, assume that material amounts are involved. Do not consider including an emphasis of matter paragraph in an "auditor discretionary" circumstance.Situations:

1. A company has departed from GAAP.2. A company's inventory records were deficient and the auditor was required to satisfy herself that the inventory was properly stated using alternative procedures. She is satisfied that she has sufficient appropriate evidence.3. In auditing a client, an auditor has determined that substantial doubt exists about an entity's ability to continue as a going concern.4. A group auditor decides not to take responsibility for the work of the component auditor who audited a 70% owned subsidiary and issued an unmodified opinion. The total assets and revenues of the subsidiary are 5% and 8%, respectively, of the total assets and revenues of the entity being audited.5. A company changes from FIFO to LIFO for inventory valuation and the auditor concurs with the change. The change has a material effect on the comparability of the entity's financial statements this year, but is expected to have an immaterial effect in the future.6. Inadequate record retention policies by the client have resulted in a situation in which a CPA is unable to obtain sufficient appropriate audit evidence with respect to a material account.7. A CPA has decided to emphasize in the audit report that the company she audited is a component of XYZ Company, its parent.8. A client has changed its estimate of likely doubtful accounts from 2% of credit sales to 3%. The auditor believes the change to be reasonable.

Reply as to the type of opinion and other modification to the audit report as follows:

If more than one type of opinion is appropriate list eachone with "Report 1" and one with "Report 2." If only one is appropriate, in "Report 2" place X, which indicates no second type of report is appropriate.

63.William & Plaud are group auditors for the Lowell Corporation. One of the subsidiaries of Lowell Corporation, Wilson Manufacturing Co., is audited by Lyle & Adams.

a. If William & Plaud make reference in their report to reliance on the report of the component auditors are they qualifying their opinion? Explain.b. Regardless of whether William & Plaud make reference to reliance on the report of the component auditors, they should perform certain procedures with respect to Lyle and Adams' audit. What are these procedures?

Chapter 17 Auditors' Reports Answer Key

True / False Questions

1.Audit reports should be dated the date on which sufficient appropriate audit evidence has been collected.TRUE

AACSB: CommunicationAICPA BB: IndustryAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 17-01 Describe the standard audit report for nonpublic entity (nonissuer) audits.Topic: Financial Statements and Standard Unmodified Audit Reports2.When the auditors are unable to comply with generally accepted auditing standards, they should issue an opinion that is unmodified, but include an additional emphasis of matter paragraph in the report.FALSE

AACSB: CommunicationAICPA BB: IndustryAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 17-03 Identify the circumstances that result in audit reports with emphasis of matter paragraphs and unmodified opinions.Topic: Reports with an Unmodified Opinion and an Emphasis of Matter Paragraph3.When evaluating the results of audit tests, materiality depends upon both the dollar amount and the nature of the item.TRUE

AACSB: CommunicationAICPA BB: IndustryAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 17-04 Identify the circumstances that result in modified audit opinions.Topic: Modified Opinions4.A public company's financial statements should be prepared following standards of the Public Company Accounting Oversight Board.FALSE

AACSB: CommunicationAICPA BB: IndustryAICPA BB: LegalAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 17-02 Describe the standard audit report for public entity (issuer) audits.Topic: Expression of an Opinion5.If financial statements fail to disclose a material fact, the auditors may disclose the information in an emphasis of matter paragraph and, depending upon materiality, issue either a qualified opinion or adverse opinion on the statements.TRUE

AACSB: CommunicationAICPA BB: IndustryAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 17-04 Identify the circumstances that result in modified audit opinions.Topic: Modified Opinions6.If financial statements contain a material departure from generally accepted accounting principles, the auditors usually should issue a disclaimer of opinion.FALSE

AACSB: CommunicationAICPA BB: IndustryAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 17-04 Identify the circumstances that result in modified audit opinions.Topic: Modified Opinions7.A change that the auditor agrees with from one generally accepted accounting principle to another generally accepted accounting principle that has a pervasive effect on net income usually results in an adverse opinion by the auditors.FALSE

AACSB: CommunicationAICPA BB: IndustryAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 17-04 Identify the circumstances that result in modified audit opinions.Topic: Modified Opinions8.When there is a significant question about a company's ability to remain a going concern, the report issued is usually unmodified with an emphasis of matter paragraph.TRUE

AACSB: CommunicationAICPA BB: IndustryAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 17-03 Identify the circumstances that result in audit reports with emphasis of matter paragraphs and unmodified opinions.Topic: Reports with an Unmodified Opinion and an Emphasis of Matter Paragraph9.A client imposed scope limitation will generally result in a disclaimer of opinion, regardless of whether sufficient appropriate audit evidence is gathered using alternative procedures.FALSE

AACSB: CommunicationAICPA BB: IndustryAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 17-04 Identify the circumstances that result in modified audit opinions.Topic: Modified Opinions10.Regulation S-X governs the form and content of financial statements filed with the SEC.TRUE

AACSB: CommunicationAICPA BB: IndustryAICPA BB: LegalAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 17-05 Describe the auditors' responsibilities for reporting on comparative financial statements.Topic: Additional Reporting Issues

Multiple Choice Questions

11.Which of the following is not explicitly included in an audit report for a nonpublic company?A.A statement that the auditor believes that his or her audit provides a reasonable basis for expressing negative assurance.B.A statement that the auditor's responsibility is to express an opinion on the financial statements.C.A statement that the financial statements are the responsibility of management.D.A title with the word "independent."

AACSB: CommunicationAICPA BB: IndustryAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 17-01 Describe the standard audit report for nonpublic entity (nonissuer) audits.Topic: Financial Statements and Standard Unmodified Audit Reports12.When an auditor has concluded there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time beyond the current financial statement date (9/30/X1), the auditor's responsibility includes:A.Preparing prospective financial information to verify whether management's plans can be effectively implemented.B.Projecting conditions and events from one year prior to this year's date (9/30/X0) to 9/30/X1.C.Issuing an adverse or negative assurance opinion, depending upon materiality, due to the possible effects on the financial statements.D.Considering the adequacy of disclosure about the entity's possible inability to continue as a going concern.

AACSB: CommunicationAICPA BB: IndustryAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 17-03 Identify the circumstances that result in audit reports with emphasis of matter paragraphs and unmodified opinions.Topic: Reports with an Unmodified Opinion and an Emphasis of Matter Paragraph13.A basis for a modification paragraph in the audit of the financial statements of a nonpublic company:A.Is only included with qualified, adverse or disclaimers of opinion.B.Is presented after the opinion paragraph.C.Has a section title: Emphasis of Matter.D.Must be included in all nonpublic company audit reports.

AACSB: CommunicationAICPA BB: IndustryAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 17-01 Describe the standard audit report for nonpublic entity (nonissuer) audits.Topic: Financial Statements and Standard Unmodified Audit Reports14.After considering an entity's negative trends and financial difficulties, an auditor has substantial doubt about the entity's ability to continue as a going concern. The auditor's considerations relating to management's plans for dealing with the adverse effects of these conditions most likely would include management's plans to:A.Increase current dividend distributions.B.Reduce existing lines of credit.C.Increase ownership equity.D.Purchase assets formerly leased.

AACSB: CommunicationAICPA BB: IndustryAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 17-03 Identify the circumstances that result in audit reports with emphasis of matter paragraphs and unmodified opinions.Source: AICPATopic: Reports with an Unmodified Opinion and an Emphasis of Matter Paragraph15.When an auditor does not confirm material accounts receivable, but is satisfied by the application of alternative auditing procedures, she normally should:A.Issue an unmodified opinion, but disclose elsewhere in the report this departure from a customary procedure.B.Issue an unmodified opinion with no reference to this omission.C.Issue a qualified opinion or a disclaimer, depending on the materiality of the receivables.D.Issue an adverse opinion.

AACSB: CommunicationAICPA BB: IndustryAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 17-01 Describe the standard audit report for nonpublic entity (nonissuer) audits.Topic: Financial Statements and Standard Unmodified Audit Reports16.When financial statements are affected by a material departure from generally accepted accounting principles, the auditors should:A.Issue an unmodified opinion with a basis for modification paragraph.B.Withdraw from the engagement.C.Issue an "except for" qualification or an adverse opinion.D.Issue an "except for" qualification or a disclaimer of opinion.

AACSB: CommunicationAICPA BB: IndustryAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 17-04 Identify the circumstances that result in modified audit opinions.Topic: Modified Opinions17.When an auditor of financial statements has substantial doubt about an entity's ability to continue as a going concern, the auditor most likely would express a qualified opinion if:A.The effects of the adverse financial conditions are likely to be negative.B.Information about the entity's ability to continue as a going concern is not disclosed in the financial statements.C.Management has no plans to reduce or delay future expenditures.D.Negative trends and recurring operating losses appear to be irreversible.

AACSB: CommunicationAICPA BB: IndustryAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 17-03 Identify the circumstances that result in audit reports with emphasis of matter paragraphs and unmodified opinions.Source: AICPATopic: Reports with an Unmodified Opinion and an Emphasis of Matter Paragraph18.An auditor of financial statements believes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. In evaluating the entity's plans for dealing with the adverse effects of future conditions and events, the auditor most likely would consider, as a mitigating factor, the entity's plans to:A.Repurchase the entity's stock at a price below its book value.B.Issue stock options to key executives.C.Lease rather than purchase operating facilities.D.Accelerate the due date of an existing mortgage.

AACSB: CommunicationAICPA BB: IndustryAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 17-03 Identify the circumstances that result in audit reports with emphasis of matter paragraphs and unmodified opinions.Source: AICPATopic: Reports with an Unmodified Opinion and an Emphasis of Matter Paragraph19.Which of the following procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern?A.Performing cutoff tests of sales transactions with customers with long-standing receivable balances.B.Evaluating the entity's procedures for identifying and recording related party transactions.C.Inspecting title documents to verify whether any real property is pledged as collateral.D.Inquiring of the entity's legal counsel about litigation, claims, and assessments.

AACSB: CommunicationAICPA BB: IndustryAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 17-03 Identify the circumstances that result in audit reports with emphasis of matter paragraphs and unmodified opinions.Source: AICPATopic: Reports with an Unmodified Opinion and an Emphasis of Matter Paragraph20.A scope restriction is least likely to result in a(an):A.Qualified opinion.B.Disclaimer of opinion.C.Adverse opinion.D.Standard unmodified opinion.

AACSB: CommunicationAICPA BB: IndustryAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 17-04 Identify the circumstances that result in modified audit opinions.Topic: Modified Opinions21.When a client declines to disclose essential information in the financial statements or notes, the auditor of the financial statements should:A.Provide the information in the audit report, if practicable, and qualify the opinion because of a limitation on the scope of the audit.B.Provide the information in the audit report, if practicable, and qualify the opinion because of a departure from GAAP.C.Issue a disclaimer of opinion because the client has interfered with the auditor's function of assessing the adequacy of disclosure.D.Issue an unmodified opinion, but inform the reader by including the omitted information in the audit report.

AACSB: CommunicationAICPA BB: IndustryAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 17-04 Identify the circumstances that result in modified audit opinions.Topic: Modified Opinions22.CPA Firm A has performed most of the audit of Consolidated Company's financial statements and qualifies as the group auditor. CPA Firm B did the remainder of the work. Firm A wishes to assume full responsibility for Firm B's work. Which of the following statements is correct?A.Such assumption of responsibility violates the profession's standards.B.In such circumstances, when appropriate requirements have been met, Firm A should issue a standard unmodified opinion on the financial statements.C.In such circumstances, when appropriate requirements have been met, Firm A should issue an unmodified opinion on the financial statements but should make appropriate reference to Firm B in the audit report.D.CPA firm A should normally qualify its audit report on the basis of the scope limitation involved when another CPA firm is involved.

AACSB: CommunicationAICPA BB: IndustryAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 17-03 Identify the circumstances that result in audit reports with emphasis of matter paragraphs and unmodified opinions.Topic: Reports with an Unmodified Opinion and an Emphasis of Matter Paragraph23.The Rotter Company changed accounting principles in 20X4 from those followed in 20X3. The auditor believes that the new principles are not in conformity with GAAP, and therefore that the 20X4 financial statements are misleading due to pervasive misstatements. The change (including its dollar effect) has been described in the notes to the 20X4 statements, which are being presented by themselves. Under these circumstances, in reporting on the 20X4 financial statements, the auditor should:A.Express an adverse opinion with a basis for modification paragraph disclosing the reason (the accounting change) for the opinion.B.Express an unmodified opinion with an emphasis of matter paragraph and disclose the accounting change from 20X3 and its effect on the financial statements.C.Disclaim an opinion and explain all of the reasons therefore.D.Express an adverse opinion regarding the 20X4 financial statements, without a basis for modification paragraph since the reason therefore since that reason will be included in the notes to the statements.

AACSB: CommunicationAICPA BB: IndustryAICPA FN: ReportingBloom's: ApplyDifficulty: HardLearning Objective: 17-04 Identify the circumstances that result in modified audit opinions.Topic: Modified Opinions24.Which of the following accounting changes requires an emphasis of matter paragraph regarding consistency in the auditors' report?A.A change in the estimated useful lives of a class of fixed assets.B.A write-off of a patent because future benefits do not appear to exist.C.A change from the straight line method of depreciation to an accelerated method for a class of fixed assets.D.A change in calculating bad debt expense from one percent to two percent of credit sales.

AACSB: CommunicationAICPA BB: IndustryAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 17-04 Identify the circumstances that result in modified audit opinions.Topic: Modified Opinions25.Which of the following is least likely to result in an emphasis of matter paragraph being added to an unmodified auditor's report on the financial statements of a client that sells jewelry through a retail store?A.A decision by the auditor to emphasize that the client is a part of a larger organization.B.Reliance placed upon a specialist to evaluate the diamonds.C.A change from FIFO to specific identification accounting for inventory.D.A question as to whether the client will be able to remain a going concern.

AACSB: CommunicationAICPA BB: IndustryAICPA FN: ReportingBloom's: ApplyDifficulty: HardLearning Objective: 17-03 Identify the circumstances that result in audit reports with emphasis of matter paragraphs and unmodified opinions.Topic: Reports with an Unmodified Opinion and an Emphasis of Matter Paragraph26.A client has changed the salvage values of a number of its fixed assets. The auditors believe that the salvage values are realistic. The appropriate report on the financial statements is:A.Standard unmodified.B.Unmodified with explanatory language as to consistency.C.Qualified for consistency.D.Disclaimer.

AACSB: CommunicationAICPA BB: IndustryAICPA FN: ReportingBloom's: ApplyDifficulty: HardLearning Objective: 17-01 Describe the standard audit report for nonpublic entity (nonissuer) audits.Topic: Financial Statements and Standard Unmodified Audit Reports27.Which of the following would be most likely to be an appropriate addressee for an audit report?A.The shareholders of the corporation whose financial statements were examined.B.A third party who requested that a copy of the audit report be sent to her.C.The president of the corporation whose financial statements were examined.D.The chief financial officer.

AACSB: CommunicationAICPA BB: IndustryAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 17-01 Describe the standard audit report for nonpublic entity (nonissuer) audits.Topic: Financial Statements and Standard Unmodified Audit Reports28.The term "except for" in an audit report is:A.Used in an adverse opinion.B.No longer considered appropriate.C.Used in a qualified opinion.D.Used for an unmodified opinion when an emphasis of matter paragraph is added.

AACSB: CommunicationAICPA BB: IndustryAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 17-04 Identify the circumstances that result in modified audit opinions.Topic: Modified Opinions29.The unmodified standard audit report of a nonpublic company does not explicitly state that:A.The financial statements are the responsibility of the company's management.B.The audit was conducted in accordance with accounting principles generally accepted in the United States of America.C.The auditors believe that the audit provides a reasonable basis for their opinion.D.An audit includes assessing the accounting principles used.

AACSB: CommunicationAICPA BB: IndustryAICPA FN: ReportingBloom's: ApplyDifficulty: HardLearning Objective: 17-01 Describe the standard audit report for nonpublic entity (nonissuer) audits.Topic: Financial Statements and Standard Unmodified Audit Reports30.Which of the following is not a difference between the audit report of a nonpublic and public company?A.The public company report includes the word "Registered" in the title.B.The public company report refers to standards of the PCAOB.C.The public company report has an additional paragraph referring to the client's fraud prevention procedures.D.The public company report is shorter.

AACSB: CommunicationAICPA BB: IndustryAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 17-01 Describe the standard audit report for nonpublic entity (nonissuer) audits.Topic: Financial Statements and Standard Unmodified Audit Reports31.If audited financial statements include a balance sheet and an income statement, but do not include a statement of cash flows:A.The auditors may still issue an unmodified opinion.B.The auditors should issue a qualified report for the departure from generally accepted accounting principles.C.The auditors should issue a qualified report indicating a scope limitation in that no statement of cash flows is presented.D.The auditors should disclaim an opinion on the overall financial statements.

AACSB: CommunicationAICPA BB: IndustryAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 17-04 Identify the circumstances that result in modified audit opinions.Topic: Modified Opinions32.Which of the following circumstances generally results in the issuance of a report that includes an opinion that is other than unmodified?A.The auditor is unable to obtain sufficient appropriate audit evidence.B.The group auditors for the engagement are relying on the work of component auditors.C.The financial statements are affected by a change in accounting principle due to a new FASB pronouncement.D.The auditors have decided to emphasize the fact that the company has engaged in material amounts of related party transactions.

AACSB: CommunicationAICPA BB: IndustryAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 17-04 Identify the circumstances that result in modified audit opinions.Topic: Modified Opinions33.Which of the following modifications of the auditors' report does not include an additional paragraph?A.The report is qualified because the financial statements contain a material departure from generally accepted accounting principles.B.The report includes an emphasis of a matter.C.The audit report indicates a division of responsibility between two CPA firms.D.The report is qualified because the scope of the auditors' work was limited.

AACSB: CommunicationAICPA BB: IndustryAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 17-03 Identify the circumstances that result in audit reports with emphasis of matter paragraphs and unmodified opinions.Topic: Reports with an Unmodified Opinion and an Emphasis of Matter Paragraph34.If the predecessor auditors do not reissue their audit report on comparative financial statements the successor auditors should:A.Express a qualified opinion on the comparative financial statements audited by the predecessor auditors.B.Reproduce the predecessor auditors' report and include it with the new set of financial statements.C.Have the client omit the comparative financial statements.D.Refer to the report of the predecessor auditors.

AACSB: CommunicationAICPA BB: IndustryAICPA BB: LegalAICPA FN: ReportingBloom's: ApplyDifficulty: HardLearning Objective: 17-05 Describe the auditors' responsibilities for reporting on comparative financial statements.Topic: Additional Reporting Issues35.An audit client has refused to allow the auditors to perform a presumptively mandatory auditing procedure and there are no other effective alternate procedures available. The circumstance would normally result in the issuance of:A.A disclaimer of opinion.B.An adverse opinion.C.A standard unmodified opinion with a qualified scope paragraph.D.An unmodified report with an emphasis of matter paragraph.

AACSB: CommunicationAICPA BB: IndustryAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 17-04 Identify the circumstances that result in modified audit opinions.Topic: Modified Opinions36.Which of the following is a "registration statement" that is filed with the SEC by a company planning to issue securities to the public?A.Form 8-K.B.Form S-1.C.Form 10-Q.D.Form 10-K.

AACSB: CommunicationAICPA BB: IndustryAICPA BB: LegalAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 17-05 Describe the auditors' responsibilities for reporting on comparative financial statements.Topic: Additional Reporting Issues37.If group auditors make no reference to component auditors whose work they have relied on as a part of the basis for their report, the group auditors:A.Are not required to investigate the professional reputation of the component auditors.B.Are issuing an inappropriate report.C.Are assuming responsibility for the work of the component auditors.D.Are issuing a qualified opinion.

AACSB: CommunicationAICPA BB: IndustryAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 17-03 Identify the circumstances that result in audit reports with emphasis of matter paragraphs and unmodified opinions.Topic: Reports with an Unmodified Opinion and an Emphasis of Matter Paragraph38.After performing all necessary procedures the predecessor auditors reissue a prior-period report on financial statements at the request of the client without revising the original wording. The predecessor auditors should:A.Delete the date of the report.B.Dual-date the report.C.Use the reissue date.D.Use the date of the previous report.

AACSB: CommunicationAICPA BB: IndustryAICPA FN: ReportingBloom's: ApplyDifficulty: HardLearning Objective: 17-01 Describe the standard audit report for nonpublic entity (nonissuer) audits.Source: AICPATopic: Financial Statements and Standard Unmodified Audit Reports39.When an adverse opinion is expressed, the opinion paragraph should include a direct reference to:A.A note to the financial statements which discusses the basis for the opinion.B.The Auditor's Responsibility section of the audit report which discusses the basis for the opinion rendered.C.A separate paragraph (section) which discusses the basis for the opinion rendered.D.The consistency in the application of generally accepted accounting principles.

AACSB: CommunicationAICPA BB: IndustryAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 17-04 Identify the circumstances that result in modified audit opinions.Topic: Modified Opinions40.It is not appropriate for the auditors' report to refer a reader to a financial statement note for details regarding a(an):A.Change in accounting principle.B.Limitation in the scope of the audit.C.Uncertainty.D.Related party transaction.

AACSB: CommunicationAICPA BB: IndustryAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 17-04 Identify the circumstances that result in modified audit opinions.Source: AICPATopic: Modified Opinions41.Under which of the following set of circumstances might the auditors disclaim an opinion?A.The financial statements contain a departure from generally accepted accounting principles, the effect of which is material.B.The group auditors decide to make reference to the report of component auditor who audited a subsidiary.C.There has been a material change between periods in the method of application of accounting principles.D.There are significant scope limitations on the audit.

AACSB: CommunicationAICPA BB: IndustryAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 17-04 Identify the circumstances that result in modified audit opinions.Source: AICPATopic: Modified Opinions42.The auditors include an emphasis of matter paragraph in report with an unmodified opinion in order to emphasize that the entity being reported upon is a subsidiary of another business enterprise. The inclusion of this paragraph:A.Is appropriate and would not negate the unmodified opinion.B.Is considered a qualification of the opinion.C.Is a violation of generally accepted reporting standards if this information is disclosed in notes to the financial statements.D.Necessitates a revision of the opinion paragraph to include the phrase "with the foregoing explanation."

AACSB: CommunicationAICPA BB: IndustryAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 17-03 Identify the circumstances that result in audit reports with emphasis of matter paragraphs and unmodified opinions.Source: AICPATopic: Reports with an Unmodified Opinion and an Emphasis of Matter Paragraph43.An emphasis of a matter paragraph ordinarily:A.Relates to a report with a modified opinion.B.Follows the opinion paragraph.C.May either precede or follow the opinion paragraph.D.Is only included in an audit report with an adverse opinion.

AACSB: CommunicationAICPA BB: IndustryAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 17-03 Identify the circumstances that result in audit reports with emphasis of matter paragraphs and unmodified opinions.Topic: Reports with an Unmodified Opinion and an Emphasis of Matter Paragraph44.Which of the following is least likely to result in qualification of the auditors' opinion due to a scope limitation?A.Scope limitations imposed by the client.B.Reliance placed upon the report of component auditors.C.Inability to obtain sufficient appropriate audit evidence.D.Inadequate accounting records.

AACSB: CommunicationAICPA BB: IndustryAICPA FN: ReportingBloom's: ApplyDifficulty: HardLearning Objective: 17-03 Identify the circumstances that result in audit reports with emphasis of matter paragraphs and unmodified opinions.Source: AICPATopic: Reports with an Unmodified Opinion and an Emphasis of Matter Paragraph45.For a continuing audit client, when a complete set of financial statements is presented on a comparative basis for two years, the auditors' opinion would refer to:A.Only the current year under audit.B.Either one or both years at the option of the auditors.C.Each of the two years plus the preceding year.D.Each of the years in the two-year period.

AACSB: CommunicationAICPA BB: IndustryAICPA BB: LegalAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 17-05 Describe the auditors' responsibilities for reporting on comparative financial statements.Source: AICPATopic: Additional Reporting Issues46.Which of the following representations does an auditor make explicitly and which implicitly when issuing an unmodified (unqualified) opinion on public company financial statements?

A.Option AB.Option BC.Option CD.Option D

AACSB: CommunicationAICPA BB: IndustryAICPA BB: LegalAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 17-02 Describe the standard audit report for public entity (issuer) audits.Topic: Expression of an Opinion47.For a particular entity's financial statements to be presented fairly in conformity with generally accepted accounting principles, it is not required that the principles selected:A.Be appropriate in the circumstances for the particular entity.B.Reflect transactions in a manner that presents the financial statements within a range of acceptable limits.C.Present information in the financial statements that is classified and summarized in a reasonable manner.D.Be applied on a basis consistent with those followed in the prior year.

AACSB: CommunicationAICPA BB: IndustryAICPA BB: LegalAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 17-05 Describe the auditors' responsibilities for reporting on comparative financial statements.Source: AICPATopic: Additional Reporting Issues48.In which of the following circumstances will it be most likely that an adverse opinion is considered appropriate?A.The auditor is not independent with respect to the enterprise being audited.B.The statements are not in conformity with generally accepted accounting principles due to a departure from GAAP with an immaterial effect on the financial statements.C.The statements are not in conformity with generally accepted accounting principles regarding pension plans.D.A client-imposed scope limitation prevents the auditor from obtaining sufficient appropriate audit evidence.

AACSB: CommunicationAICPA BB: IndustryAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 17-04 Identify the circumstances that result in modified audit opinions.Source: AICPATopic: Modified Opinions49.An independent auditor has concluded that substantial doubt remains about a client's ability to continue as a going concern, but the client's financial statements have properly disclosed all of its solvency problems. The auditor would probably issue a(an):A.Unmodified opinion with an appropriate emphasis of matter paragraph.B."Except for" qualified opinion.C.Standard unmodified opinion.D.Adverse opinion.

AACSB: CommunicationAICPA BB: IndustryAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 17-03 Identify the circumstances that result in audit reports with emphasis of matter paragraphs and unmodified opinions.Source: AICPATopic: Reports with an Unmodified Opinion and an Emphasis of Matter Paragraph50.A basis for modification paragraph is ordinarily placed:A.Within the "Auditor's Responsibility" section of the audit report.B.Preceding the opinion section.C.After the opinion section.D.Based on the auditor's judgment either before or after the opinion section.

AACSB: CommunicationAICPA BB: IndustryAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 17-04 Identify the circumstances that result in modified audit opinions.Source: AICPATopic: Modified Opinions51.Doe, an independent auditor, was engaged to perform an audit of the financial statements of Ally Incorporated one month after its fiscal year had ended. Although the inventory count was not observed by Doe, and accounts receivable were not confirmed by direct communication with debtors, Doe was able to obtain sufficient appropriate audit evidence by applying alternative auditing procedures. Doe's audit report will probably contain:A.A standard unmodified opinion.B.An unmodified opinion and an emphasis of matter paragraph.C.Either a qualified opinion or a disclaimer of opinion.D.An "except for" qualification.

AACSB: CommunicationAICPA BB: IndustryAICPA FN: ReportingBloom's: ApplyDifficulty: HardLearning Objective: 17-01 Describe the standard audit report for nonpublic entity (nonissuer) audits.Source: AICPATopic: Financial Statements and Standard Unmodified Audit Reports52.Which of the following is a general purpose financial reporting framework?A.Generally accepted auditing standards.B.Auditing Standards of the Public Company Accounting Oversight Board.C.International Standards of Auditing.D.International Financial Reporting Standards

AACSB: CommunicationAICPA BB: IndustryAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: IntroductionTopic: Financial Statements53.Morgan, CPA, is the group auditor for a multinational corporation. Another CPA has examined and reported on the financial statements of a significant subsidiary of the corporation. Morgan is satisfied with the independence and professional reputation of the component auditor, as well as the quality of the component auditor's audit. With respect to Morgan's report on the consolidated financial statements, taken as a whole, Morgan:A.Must not refer to the audit of the component auditor.B.Must refer to the audit of the component auditor.C.May refer to the audit of the component auditor.D.May refer to the audit of the component auditor, in which case Morgan must include in the audit report on the consolidated financial statements a qualified opinion with respect to the audit of the component auditor.

AACSB: CommunicationAICPA BB: IndustryAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 17-03 Identify the circumstances that result in audit reports with emphasis of matter paragraphs and unmodified opinions.Source: AICPATopic: Reports with an Unmodified Opinion and an Emphasis of Matter Paragraph54.When reporting on comparative financial statements where the financial statements of the prior period have been examined by a predecessor auditor whose report is not presented, the successor auditor should indicate in the report:A.The reasons why the predecessor auditor's report is not presented.B.The identity of the predecessor auditor who examined the financial statements of the prior year.C.Whether the predecessor auditor's review of the current year's financial statements revealed any matter that might have a material effect on the successor auditor's opinion.D.The type of opinion expressed by the predecessor auditor.

AACSB: CommunicationAICPA BB: IndustryAICPA BB: LegalAICPA FN: ReportingBloom's: ApplyDifficulty: HardLearning Objective: 17-05 Describe the auditors' responsibilities for reporting on comparative financial statements.Source: AICPATopic: Additional Reporting Issues55.If an accounting change has no material effect on the financial statements in the current year, but the change is reasonably certain to have a material effect in later years, the change should be:A.Referred to in the auditor's report for the current year.B.Disclosed in the notes to the financial statements of the current year.C.Disclosed in the notes to the financial statements and referred to in the auditor's report for the current year.D.Treated as a subsequent event.

AACSB: CommunicationAICPA BB: IndustryAICPA FN: ReportingBloom's: ApplyDifficulty: HardLearning Objective: 17-03 Identify the circumstances that result in audit reports with emphasis of matter paragraphs and unmodified opinions.Source: AICPATopic: Reports with an Unmodified Opinion and an Emphasis of Matter Paragraph56.When financial statements of a prior period are presented on a comparative basis with financial statements of the current period, the continuing auditor is responsible for:A.Expressing dual dated opinions.B.Updating the report on the previous financial statements only if there has not been a change in the opinion.C.Updating the report on the previous financial statements only if the previous report was qualified and the reasons for the qualification no longer exist.D.Updating the report on the previous financial statements regardless of the opinion previously issued.

AACSB: CommunicationAICPA BB: IndustryAICPA BB: LegalAICPA FN: ReportingBloom's: ApplyDifficulty: HardLearning Objective: 17-05 Describe the auditors' responsibilities for reporting on comparative financial statements.Source: AICPATopic: Additional Reporting Issues57.An auditor has been asked to report on the balance sheet of Kane Company but not on the other basic financial statements. The auditor will have access to all information underlying the basic financial statements. Under these circumstances, the auditor:A.May accept the engagement.B.May accept the engagement but must disclaim an opinion because of an inability to apply the procedures considered necessary.C.Should refuse the engagement because there is a client-imposed scope limitation.D.Should refuse the engagement because of a departure from generally accepted auditing standards.

AACSB: CommunicationAICPA BB: IndustryAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: IntroductionSource: AICPATopic: Financial Statements58.When the auditor is unable to determine the amounts associated with noncompliance with a law by client personnel due to a scope limitation, the auditor should issue a(an):A.Standard unmodified opinion.B.Disclaimer of opinion.C.Adverse opinion.D.Unmodified opinion with a separate emphasis of matter paragraph.

AACSB: CommunicationAICPA BB: IndustryAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 17-04 Identify the circumstances that result in modified audit opinions.Source: AICPATopic: Modified Opinions59.Which of the following will result in emphasis of matter as to consistency in the auditor's report, regardless of whether the item is fully disclosed in the financial statements?A.A change in accounting estimate.B.A change from an unacceptable accounting principle to a generally accepted one.C.Correction of an error not involving a change in accounting principle.D.A change in classification.

AACSB: CommunicationAICPA BB: IndustryAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 17-04 Identify the circumstances that result in modified audit opinions.Source: AICPATopic: Modified Opinions60.An auditor's report on comparative financial statements should be dated as of the date of the:A.Issuance of the report.B.Accumulation of sufficient appropriate audit evidence.C.Latest financial statements being reported on.D.Last related-party transaction disclosed in the statements.

AACSB: CommunicationAICPA BB: IndustryAICPA BB: LegalAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 17-05 Describe the auditors' responsibilities for reporting on comparative financial statements.Source: AICPATopic: Additional Reporting Issues61.In which of the following circumstances would an auditor of financial statements be most likely to express an adverse opinion?A.The statements are not in conformity with FASB requirements regarding the capitalization of leases.B.Information comes to the auditor's attention that raises substantial doubt about the entity's ability to continue in existence.C.The chief executive officer refuses the auditor access to minutes of board of directors' meetings.D.Tests of controls show that the entity's internal control is so poor that it can not be relied upon.

AACSB: CommunicationAICPA BB: IndustryAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 17-04 Identify the circumstances that result in modified audit opinions.Source: AICPATopic: Modified Opinions Essay Questions

62.Use the accompanying solution sheet to reply to the eight situations below that relate to the audit of financial statements of nonpublic companies. Unless indicated otherwise, assume that material amounts are involved. Do not consider including an emphasis of matter paragraph in an "auditor discretionary" circumstance.Situations:

1. A company has departed from GAAP.2. A company's inventory records were deficient and the auditor was required to satisfy herself that the inventory was properly stated using alternative procedures. She is satisfied that she has sufficient appropriate evidence.3. In auditing a client, an auditor has determined that substantial doubt exists about an entity's ability to continue as a going concern.4. A group auditor decides not to take responsibility for the work of the component auditor who audited a 70% owned subsidiary and issued an unmodified opinion. The total assets and revenues of the subsidiary are 5% and 8%, respectively, of the total assets and revenues of the entity being audited.5. A company changes from FIFO to LIFO for inventory valuation and the auditor concurs with the change. The change has a material effect on the comparability of the entity's financial statements this year, but is expected to have an immaterial effect in the future.6. Inadequate record retention policies by the client have resulted in a situation in which a CPA is unable to obtain sufficient appropriate audit evidence with respect to a material account.7. A CPA has decided to emphasize in the audit report that the company she audited is a component of XYZ Company, its parent.8. A client has changed its estimate of likely doubtful accounts from 2% of credit sales to 3%. The auditor believes the change to be reasonable.

Reply as to the type of opinion and other modification to the audit report as follows:

If more than one type of opinion is appropriate list eachone with "Report 1" and one with "Report 2." If only one is appropriate, in "Report 2" place X, which indicates no second type of report is appropriate.

AACSB: CommunicationAICPA BB: IndustryAICPA BB: LegalAICPA FN: ReportingBloom's: ApplyDifficulty: HardLearning Objective: 17-01 Describe the standard audit report for nonpublic entity (nonissuer) audits.Learning Objective: 17-02 Describe the standard audit report for public entity (issuer) audits.Learning Objective: 17-04 Identify the circumstances that result in modified audit opinions.Topic: Expression of an OpinionTopic: Financial Statements and Standard Unmodified Audit ReportsTopic: Modified Opinions63.William & Plaud are group auditors for the Lowell Corporation. One of the subsidiaries of Lowell Corporation, Wilson Manufacturing Co., is audited by Lyle & Adams.

a. If William & Plaud make reference in their report to reliance on the report of the component auditors are they qualifying their opinion? Explain.b. Regardless of whether William & Plaud make reference to reliance on the report of the component auditors, they should perform certain procedures with respect to Lyle and Adams' audit. What are these procedures?

a. No. The auditors are indicating a division of responsibility between them and the component auditors.b. When a component auditor exists, the group auditor should determine whether sufficient appropriate audit evidence can reasonably be expected to be obtained regarding overall group controls, the consolidation process and the financial information on the components. In addition, the group engagement team should obtain an understanding of whether the component auditor is competent and understands and will comply with all ethical requirements, particularly independence.

( The extent to which the group engagement team will be involved with the component auditor.( Whether the group engagement team will be able to obtain necessary information on the consolidation process from the component auditor.( Whether the component auditor operates in a regulatory environment that actively oversees auditors.

The group auditor should communicate with the component auditor, including informing the component auditor of how its work will be used, ethical requirements, providing a list of related parties, and identifying significant risk of misstatements of the group financial statements.

AACSB: CommunicationAICPA BB: IndustryAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 17-03 Identify the circumstances that result in audit reports with emphasis of matter paragraphs and unmodified opinions.Topic: Reports with an Unmodified Opinion and an Emphasis of Matter Paragraph17-1