When financial statements are affected by a material departure from generally accepted?

Chapter 14 Audit Reports

MULTIPLE CHOICE:

1. An auditor would issue an adverse opinion if a. The audit was begun by other independent auditors who withdrew from the engagement. b. A qualified opinion cannot be given because the auditor lacks independence. c. The restriction on the scope of the audit was significant. d. The statements taken as a whole do not fairly present the financial condition and results of operations of the company.

ANSWER: D

1. An audit report contains the following paragraph: "Because of the inadequacies in the company's accounting records during the year ended June 30, 2003, it was not practicable to extend our auditing procedures to the extent necessary to enable us to obtain certain evidential matter as it relates to classification of certain items in the consolidated statements of operations." This paragraph most likely describes a. A material departure from GAAP requiring a qualified audit opinion. b. An uncertainty that should not lead to a qualified opinion. c. A matter that the auditor wishes to emphasize and that does not lead to a qualified audit opinion. d. A material scope restriction requiring a qualification of the audit opinion.

ANSWER: D

1. A limitation on the scope of the auditor's examination sufficient to preclude an unqualified opinion will always result when management a. Asks the auditor to report on the balance sheet and not on the other basic financial statements. b. Refuses to permit its lawyer to respond to the letter of audit inquiry. c. Discloses material related party transactions in the footnotes to the financial statements. d. Knows that confirmation of accounts receivable is not feasible.

Chapter 14 Audit Reports

ANSWER: B

1. The auditor issued a qualified opinion covering the financial statements of Client A for the year ended December 31, 2002. The reason for the qualification was a departure from GAAP. In presenting comparative statements for the years ended December 31, 2002 nd 2003, the client revised the 2002 financial statements to correct the previous departure from GAAP. The auditor's 2003 report on the 12/31/02 and 12/31/03 comparative financial statements will a. Express a qualified opinion on the 2002 financial statements and an unqualified opinion on the 2003 statements. b. Express unqualified opinions on both the 2002 and 2003 financial statements. c. Retain the qualified opinion covering the 20 02 statements, but add an explanatory paragraph describing the correction of the prior departure from GAAP. d. Render qualified audit opinions for both 2002 and 2003 financial statements given the 2003 carryover effect of the 2002 error.

ANSWER: B

1. When financial statements are presented that are not in conformity with generally accepted accounting principles, an auditor may issue a(an) "Except for" Disclaimer opinion of an opinion a. Yes No b. Yes Yes c. No Yes d. No No

ANSWER: A

1. Under which of the following circumstances would a disclaimer of opinion not be appropriate? a. The auditor is engaged after fiscal year-end and is unable to observe physical inventories or apply alternative procedures to verify their balances. b. The auditor is unable to determine the amounts associated with illegal acts committed by the client's management. c. The financial statements fail to contain adequate disclosure concerning related party transactions.

Chapter 14 Audit Reports

1. When there is a significant change in accounting principle, an auditor's report should refer to the lack of consistency in a. The scope paragraph. b. An explanatory paragraph between the second paragraph and the opinion paragraph. c. The opinion paragraph. d. An explanatory paragraph following the opinion paragraph.

ANSWER: D

1. Which of the following subsequent events will be least likely to result in an adjustment to the financial statements? a. Culmination of events affecting the realization value of accounts receivable owned as of the balance sheet date. b. Culmination of events affecting the realization of inventories owned as of the balance sheet date. c. Material changes in the settlement of liabilities which were estimated as of the balance sheet date. d. Material changes in the quoted market prices of listed investment securities since the balance sheet date.

ANSWER: D

1. Soon after Boyd's audit report was issued, Boyd learned of certain related party transactions that occurred during the year under audit. These transactions were not disclosed in the notes to the financial statements. Boyd should a. Plan to audit the transactions during the next engagement. b. Recall all copies of the audited financial statements. c. Determine whether the lack of disclosure would affect the auditor's report. d. Ask the client to disclose the transactions in subsequent interim statements.

ANSWER: C

1. Under which of the following circumstances would a disclaimer of opinion not be appropriate? a. The financial statements fail to contain adequate disclosure concerning related party transactions. b. The client refuses to permit its attorney to furnish

Chapter 14 Audit Reports

information requested in a letter of audit inquiry. c. The auditor is engaged after fiscal year-end and is unable to observe physical inventories or apply alternative procedures to verify their balances. d. The auditor is unable to determine the amounts associated with illegal acts committed by the client's management.

ANSWER: A

1. An auditor concludes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. If the entity's disclosures concerning this matter are adequate, the audit report may include a(an) Disclaimer "Except for" of opinion qualified opinion a. Yes Yes b. No No c. No Yes d. Yes No

ANSWER: D

1. Management of Blue Company has decided not to account for a material transaction in accordance with the provisions of an FASB Standard. In setting forth its reasons in a note to the financial statements, management has clearly demonstrated that due to unusual circumstances the financial statements presented in accordance with the FASB Standard would be misleading. The auditor's report should include an explanatory separate paragraph and contain a(an) a. Adverse opinion. b. Unqualified opinion. c. "Except for" qualified opinion. d. "Subject to" qualified opinion.

ANSWER: B

1. In the "management discussion and analysis" contained in the 2002 annual report of Dermicile Corporation, management stated that total sales were $4 billion and net profit was $500 million. The audited sales and net profit, however, were $3 billion and $450 million respectively. The financial statements, contained in the annual report, reflected the audited figures and the CPA planned to issue an unqualified opinion. Upon noting the inconsistencies

Chapter 14 Audit Reports

Morgan's report on the consolidated financial statements, taken as a whole, Morgan a. Must not refer to the examination of the other auditor. b. Must refer to the examination of the other auditor. c. May refer to the examination of the other auditor. d. May refer to the examination of the other auditor, in which case Morgan must include in the auditor's report on the consolidated financial statements a qualified opinion with respect to the examination of the other auditor.

ANSWER: C

1. A post-audit review, conducted by another audit partner, discovered that the audit team had failed to examine or confirm securities held in safekeeping. The amounts involved were material in relation to reported net assets. The unqualified audit report, along with the audited financial statements, had been released two months earlier. Based on this information, the audit team should a. Request the client for permission to examine or confirm the securities. b. Notify persons known to be relying on the audit report that the report can no longer be relied upon. c. Draft a revised audit report containing an opinion qualified for a scope restriction. d. Ignore the finding inasmuch as the financial statements and audit report have already been released.

ANSWER: A

1. The auditor's report should be dated as of the date on which the a. Report is delivered to the client. b. Field work is completed. c. Fiscal period under audit ends. d. Review of the working papers is complete.

ANSWER: B

1. After issuing the audit report, the auditor may become aware of information that would have affected the audit report had it been known at the time. Given discovery of such information, the auditor must take appropriate action. Which of the following actions would be considered inappropriate under these circumstances?

Chapter 14 Audit Reports

a. Determine whether the information is reliable and whether the facts existed at the date of the audit report. b. Request the client to disclose, to financial statement users, the newly discovered facts and their impact on the financial statements. c. If the client refuses to inform third parties, the auditor should notify the board of directors and regulatory agencies having jurisdiction over the client that the auditors' report can no longer be relied upon. d. Draft a revised audit report expressing a qualified or adverse opinion, depending on the materiality of the effect, and transmit the report to the stockholders.

ANSWER: D

1. Which of the following best describes the auditor's responsibility for "other information" included in the annual report to stockholders which contains financial statements and the auditor's report? a. The auditor has no obligation to read the "other information." b. The auditor has no obligation to corroborate the "other information," but should read the "other information" to determine whether it is materially inconsistent with the financial statements. c. The auditor should extend the examination to the extent necessary to verify the "other information." d. The auditor must modify the auditor's report to state that the "other information is unaudited" or "not covered by the auditor's report."

ANSWER: B

1. When an auditor conducts an examination in accordance with generally accepted auditing standards and concludes that the financial statements are fairly presented in accordance with a comprehensive basis of accounting other than generally accepted accounting principles such as the cash basis of accounting, the auditor should issue a a. Disclaimer of opinion. b. Review report. c. Qualified opinion. d. Special report.

ANSWER: D

Chapter 14 Audit Reports

alternative auditing procedures. Doe's auditor's report will probably contain a. A standard unqualified opinion. b. An unqualified opinion and an explanatory middle paragraph. c. Either a qualified opinion or a disclaimer of opinion. d. An "except for" qualification.

ANSWER: A

1. The adverse effects of events causing an auditor to believe there is substantial doubt about an entity's ability to continue as a going concern would most likely be mitigated by evidence relating to the a. Ability to expand operations into new product lines in the future. b. Feasibility of plans to purchase leased equipment at less than market value. c. Marketability of assets that management plans to sell. d. Committed arrangements to convert preferred stock to long-term debt.

ANSWER: C

1. Comparative financial statements include the financial statements of a prior period which were examined by a predecessor auditor whose report is not presented. If the predecessor auditor's report was qualified, the successor auditor must a. Obtain written approval from the predecessor auditor to include the prior year's financial statements. b. Issue a standard comparative audit report indicating the division of responsibility. c. Express an opinion on the current year statements alone and make no reference to the prior year statements. d. Disclose the reasons for any qualification in the predecessor auditor's opinion.

ANSWER: D

1. When reporting on financial statements prepared on a comprehensive basis of accounting other than generally accepted accounting principles, the independent auditor should include in the report a paragraph that a. States that the financial statements are not intended to be in conformity with generally accepted accounting principles.

Chapter 14 Audit Reports

b. States that the financial statements are not intended to have been examined in accordance with generally accepted auditing standards. c. Refers to the authoritative pronouncements that explain the comprehensive basis of accounting being used. d. Justifies the comprehensive basis of accounting being used.

ANSWER: A

1. After an audit report containing an unqualified opinion on a non-public client's financial statements was issued, the client decided to sell the shares of a subsidiary that accounts for 30% of its revenue and 25% of its net income. The auditor should a. Determine whether the information is reliable and, if determined to be reliable, request that revised financial statements be issued. b. Notify the entity that the auditor's report may no longer be associated with the financial statements. c. Describe the effects of this subsequently discovered information in a communication with persons known to be relying on the financial statements. d. Take no action because the auditor has no obligation to make any further inquiries. ANSWER: D

2. An audit report contained the following wording: "In our opinion, except for the omission of the segment information referred to in the preceding paragraph..." This excerpt was taken from a(n) a. Unqualified audit opinion with an explanatory paragraph added to emphasize a matter. b. Unqualified audit opinion with an explanatory paragraph added to describe a material uncertainty. c. Audit opinion qualified due to a departure from GAAP. d. Adverse audit opinion.

ANSWER: C

1. An auditor includes a separate paragraph in an otherwise unqualified report to emphasize that the entity being reported upon had significant transactions with related parties. The inclusion of this separate paragraph a. Violates generally accepted auditing standards if this information is already disclosed in footnotes to the financial statements.

Chapter 14 Audit Reports

c. An opinion as to whether the financial statements are presented fairly in conformity with the basis of accounting described. d. A description of a change in accounting principles.

ANSWER: B

1. When the financial statements are prepared on the going concern basis but the auditor concludes there is substantial doubt whether the client can continue in existence and also believes there are uncertainties about the recoverability of recorded asset amounts on the financial statements, the auditor may issue a(an) a. Adverse opinion. b. "Except for" qualified opinion for scope limitation. c. "Except for" qualified opinion for departure from GAAP. d. Unqualified opinion with an explanatory separate paragraph.

ANSWER: D

1. Client A reports property, plant, and equipment at appraisal values and records depreciation based on the appraised amounts. Also, the company does not defer income taxes for temporary differences arising from using the installment method of recognizing gross profit for tax purposes. The company uses the accrual method for financial reporting purposes. Under these circumstances, the auditor will probably issue a(n) a. Audit opinion qualified for a departure from GAAP. b. Adverse audit opinion. c. Disclaimer of opinion. d. Unqualified audit opinion with an explanatory paragraph describing the client's unique accounting practices.

ANSWER: B

1. A CPA engaged to examine financial statements observes that the accounting for a certain material item is not in conformity with generally accepted accounting principles, and that this fact is prominently disclosed in a footnote to the financial statements. The CPA should a. Express an unqualified opinion and insert a middle paragraph emphasizing the matter by reference to the footnote. b. Disclaim an opinion. c. Not allow the accounting treatment for this item to

Chapter 14 Audit Reports

affect the type of opinion because the deviation from generally accepted accounting principles was disclosed. d. Qualify the opinion because of the deviation from generally accepted accounting principles.

ANSWER: D

1. When a principal auditor decides to make reference to another auditor's examination, the principal auditor's report should always indicate clearly, in the introductory, scope, and opinion paragraphs, the a. Magnitude of the portion of the financial statements examined by the other auditor. b. Disclaimer of responsibility concerning the portion of the financial statements examined by the other auditor. c. Name of the other auditor. d. Division of responsibility.

ANSWER: D

1. An auditor may issue a qualified opinion under which of the following circumstances?

Lack of sufficient Restrictions on the competent scope of the evidential matter audit a. Yes Yes b. Yes No c. No Yes d. No No

ANSWER: A

1. In which of the following circumstances may the auditor issue the standard audit report? a. The principal auditor assumes responsibility for the work of another auditor. b. The financial statements are affected by a departure from a generally accepted accounting principle. c. Substantial doubt exists concerning the ability of the entity to continue as a going concern. d. The auditor wishes to emphasize a matter regarding the financial statements.

ANSWER: A

Chapter 14 Audit Reports

Management's Auditor's responsibility responsibility

a. Explicitly Explicitly b. Implicitly Implicitly c. Implicitly Explicitly d. Explicitly Implicitly

ANSWER: A

1. An auditor should disclose the substantive reasons for expressing an adverse opinion in an explanatory paragraph a. Preceding the scope paragraph. b. Preceding the opinion paragraph. c. Following the opinion paragraph. d. Within the notes to the financial statements.

ANSWER: B

1. When the financial statements contain a departure from generally accepted accounting principles, the effect of which is material, the auditor should a. Qualify the opinion and explain the effect of the departure from generally accepted accounting principles in a separate paragraph. b. Qualify the opinion and describe the departure from generally accepted accounting principles within the opinion paragraph. c. Disclaim an opinion and explain the effect of the departure from generally accepted accounting principles in a separate paragraph. d. Disclaim an opinion and describe the departure from generally accepted accounting principles within the opinion paragraph.

ANSWER: A

1. Tread Corp. accounts for the effect of a material accounting change prospectively when the inclusion of the cumulative effect of the change is required in the current year. The auditor would choose between expressing a(an) a. Qualified opinion or a disclaimer of opinion. b. Disclaimer of opinion or an unqualified opinion with an explanatory paragraph. c. Unqualified opinion with an explanatory paragraph and an adverse opinion. d. Adverse opinion and a qualified opinion.

Chapter 14 Audit Reports

ANSWER: D

1. The Securities and Exchange Commission has authority to a. Prescribe specific auditing procedures to detect fraud concerning inventories and accounts receivable of companies engaged in interstate commerce. b. Deny lack of privity as a defense in third-party actions for gross negligence against the auditors of public companies. c. Determine accounting principles for the purpose of financial reporting by companies offering securities to the public. d. Require a change of auditors of governmental entities after a given period of years as a means of ensuring auditor independence.

ANSWER: C

1. An auditor has previously expressed a qualified opinion on the financial statements of a prior period because of a departure from generally accepted accounting principles. The prior-period financial statements are restated in the current period to conform with generally accepted accounting principles. The auditor's updated report on the prior- period financial statements should a. Express an unqualified opinion concerning the restated financial statements. b. Be accompanied by the original auditor's report on the prior period. c. Bear the same date as the original auditor's report on the prior period. d. Qualify the opinion concerning the restated financial statements because of a change in accounting principle.

ANSWER: A

1. An auditor's report includes the following statement: "The financial statements do not present fairly the financial position, results of operations, or cash flows in conformity with generally accepted accounting principles." This auditor's report was most likely issued in connection with financial statements that are

Chapter 14 Audit Reports

ANSWER: D

COMPLETION:

1. The nature of the examination is described in the ____________ paragraph of the audit report.

ANSWER: SCOPE

1. Generally accepted auditing standards are addressed in the

paragraph of the audit report, whereas generally accepted accounting principles are the evaluation standard used in the paragraph.

ANSWER: SCOPE, OPINION

1. The two relevant dates in a dual-dated audit report are the date of completion of audit field work and the date of the .

ANSWER: SUBSEQUENT EVENT

1. An unqualified audit opinion may be rendered only when the financial statements contain no material departures from GAAP, and when no material have prevented the auditor from collecting sufficient, competent evidence.

ANSWER: SCOPE LIMITATIONS (RESTRICTIONS)

1. The statement "in our opinion the financial statements do not present fairly" is included in a(n) ____________ opinion.

ANSWER: ADVERSE

1. The responsibilities of management and the auditors with respect to the financial statements are described in the paragraph of the audit report.

ANSWER: INTRODUCTORY

1. An audit report, in a separate paragraph following the opinion paragraph, describes the impact of related party

Chapter 14 Audit Reports

transactions that have been properly reflected and disclosed in the financial statements. This form of report illustrates __.

ANSWER: EMPHASIS OF A MATTER

1. A CPA who audited the financial statements for the preceding year, and will also be auditing the current year, is said to be a auditor.

ANSWER: CONTINUING

1. If a scope restriction is material and client-imposed, the auditor should render a(an) (qualified, adverse, disclaimer of) opinion.

ANSWER: DISCLAIMER OF

1. A fourth paragraph making reference to omission of supplemental data required by FASB is categorized as .

ANSWER: EMPHASIS OF A MATTER

1. If financial statements have been prepared utilizing a comprehensive basis of accounting other than GAAP, the auditor will evaluate fairness within the framework of ____ __________ ________.

ANSWER: THE OTHER BASIS

MATCHING:

1. From the following types of audit reports, select the one that best fits each of the listed situations. A given selection may be used once, more than once, or not at all.

A. Standard audit report B. Report qualified because of scope restriction C. Report qualified because of departure from GAAP D. Adverse opinion E. Disclaimer of opinion F. Unqualified opinion with explanatory paragraph following opinion paragraph

_____1. Management refuses to permit the audit team to confirm

When financial statements are affected by a material departure from generally?

How does materiality affect financial statements?

When financial statements contain a departure from GAAP because?

What affects materiality determination?