Solution Manual for Auditing and Assurance Services 5th Edition Louwers Ramsay Sinason
Strawser Thibodeau 0078025443 9780078025440
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Chapter 12
Reports on Audited Financial Statements
True / False Questions
1. The first paragraph of the standard report on the entity's financial statements is referred to as the scope paragraph.
True False
2. The introductory paragraph of the auditors' report indicates that an audit has been conducted and identifies the financial statements the auditors examined.
True False
3. If auditors cannot apply specific auditing procedures during the examination, the opinion paragraph in the report must be qualified.
True False
4. The scope paragraph of the auditors' report contains a general description of the audit work and reference to standards of the Public Company Accounting Oversight Board.
True False
5. The introductory paragraph of the auditors' report identifies management's responsibility for the financial statements.
True False
6. Rule 203 allows auditors to issue an unqualified opinion on the entity's financial statements even when these financial statements contain a departure from an FASB standard.
True False
7. When the financial statements contain a departure from GAAP, the auditors must render an adverse opinion on the entity's financial statements.
True False
8. An adverse opinion indicates that the financial statements are not presented in conformity with GAAP.
True False
9. When there is a material departure from GAAP, auditors may issue either an adverse opinion or disclaimer of opinion on the entity's financial statements.
True False
10.The auditors' report references the consistent application of accounting principles only when the entity has changed accounting principles.
True False
11.If group auditors choose to rely on the work of component auditors, the group auditors must refer to the component auditors in their report by name.
True False
12.If the audit scope is restricted in some specific respect, but sufficient appropriate evidence is gathered by performing other procedures, the standard scope paragraph of the report need not be modified.
True False
13.Auditors are not responsible for determining whether there is a substantial doubt about an entity's ability to continue as a going concern.
True False
14.In all cases in which auditors are associated by name or participation with unaudited financial statements of public entities, the auditors must issue a disclaimer of opinion.
True False
15.When a division of responsibility is noted in the auditors' report on group financial statements, the introductory paragraph would be modified.
True False
16.If a justified departure from GAAP exists, auditors would issue an unqualified opinion but would modify the scope paragraph to describe the departure and its monetary effects.
True False
17.The auditors' report should be dated as of the date of the client's financial statements.
True False
18.If predecessor auditors had examined comparative financial statements, those auditors' reports must be presented along with the auditors' report.
True False
19.Auditors would be more likely to issue a disclaimer of opinion when a scope limitation is client imposed as opposed to circumstance imposed.
True False
20.If separate reports on the entity's financial statements and internal control over financial reporting are presented, the auditors' report on the financial statements should reference the report on internal control over financial reporting.
True False Multiple Choice Questions
21.The scope paragraph of the standard report on the entity's financial statements does not include the statement
A. "In conformity with accounting principles generally accepted in the United States of America…."
B. "We believe that our audits provide a reasonable basis for an opinion."
C. "An audit also includes assessing the accounting principles used and significant estimates made by management...."
D. "Those standards require that we plan and perform the audit to obtain reasonable assurance...."
22.Which of the following situations would not result in auditors adding an additional paragraph to their report without modifying the introductory, scope, or opinion paragraphs of that report?
A. Reference to a change in the method of accounting mandated by the issuance of a new accounting standard.
B. Reference to a going-concern uncertainty facing the client.
C. Reference to a departure from GAAP that is material but not pervasive to the financial statements.
D. Reference to an acquisition made by the client during the most recent fiscal year.
23.Which of the following statements is not included in the scope paragraph of the standard report on the entity's financial statements?
A. "Our responsibility is to express an opinion on those financial statements.…"
B. "Those standards require that we plan and perform the audit...."
C. "We believe that our audit provides a reasonable basis for our opinion."
D. "An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements."
24.Auditors are required to reference consistency in their report when there are changes in
A. Accounting estimates.
B. The format of the statement of cash flows.
C. The classification of financial statement amounts.
D. Accounting principles.
25.If financial statements contain a material but nonpervasive departure from generally accepted accounting principles, the auditors should render a(n)
A. Qualified opinion with reference to departure.
B. Adverse opinion with scope limitation reference.
C. Adverse opinion with reference to departure.
D. Disclaimer of opinion.
26.Which of the following scope limitations would ordinarily be of most concern to the auditors?
A. The inability to observe inventories because the auditors were appointed following the date of the financial statements.
B. Management's refusal to provide written representations to the auditors.
C. The inability to obtain confirmation of year-end balances from customers because of different billing dates.
D. The use of the work of component auditors in the audit of group financial statements.
27.When auditors are engaged to examine an entity's financial statements but decide to issue a disclaimer of opinion, the report would not
A. Identify management's responsibility for the financial statements.
B. Refer to any scope limitation in an additional paragraph.
C. Modify the scope paragraph to identify the basis for the disclaimer.
D. Indicate that the auditors were engaged to audit the financial statements.
28.A report that acknowledges reliance on the reports of component auditors is a type of report modification known as a(n)
A. Qualification.
B. Division of responsibility.
C. Expansion of scope.
D. Scope limitation.
29."As described in Note 5 to the financial statements, General Express changed its statistical method of computing product warranty expense for the year ended December 31, 2012" is an illustration of a
A. Consistency change requiring a qualified opinion.
B. Scope limitation.
C. Departure from generally accepted accounting principles
D. Report with a consistency modification.
30.The auditors' report on the entity's financial statements included an additional paragraph disclosing a difference of opinion between the auditors and the entity for which the auditors believed an adjustment to the financial statements should be made. The opinion paragraph of the auditors' report should express a(n)
A. Unqualified opinion.
B. Qualified opinion citing a departure from generally accepted accounting principles.
C. Qualified opinion citing a scope limitation and lack of specific evidence.
D. Disclaimer of opinion.
31.Auditors will issue an adverse opinion when
A. A severe scope limitation has been imposed by the entity.
B. A violation of generally accepted accounting principles is sufficiently material and pervasive that a qualified opinion is not justified.
C. A qualified opinion cannot be rendered because the auditors lack independence.
D. The entity's ability to continue as a going concern is subject to substantial doubt.
32.The issuance of a disclaimer of opinion generally indicates
A. The auditors cannot form an opinion on the fairness of presentation of the financial statements as a whole.
B. The auditors have some uncertainties, but these uncertainties are not so material that they cannot form an opinion on the fairness of presentation of the financial statements as a whole.
C. The auditors have observed a departure from generally accepted accounting principles but the departure is not of sufficient materiality to justify a qualified opinion.
D. The auditors have observed a departure from generally accepted accounting principles that is so material and pervasive that a qualified opinion is not justified.
33.When an entity will not permit inquiry of outside legal counsel, the auditors' report on the entity's financial statements will ordinarily contain a(n)
A. Disclaimer of opinion.
B. Qualified opinion referencing a departure from generally accepted accounting principles.
C. Unqualified opinion with a separate explanatory paragraph.
D. Adverse opinion.
34.In which of the following circumstances may auditors issue a standard report on the entity's financial statements?
A. The entity changed accounting principles having an immaterial effect on the entity's financial position, results of operations, and cash flows.
B. The auditors wish to emphasize a matter regarding the financial statements.
C. The financial statements are affected by a departure from a generally accepted accounting principle explained and justified by Rule 203 of the AICPA Code of Professional Conduct.
D. The auditors have not been able to audit a substantial portion of the balance sheet because of a circumstance-imposed scope limitation.
35.The auditors conclude that there is a material inconsistency in the "other information" in an annual report to shareholders containing audited financial statements. If the auditors conclude that the financial statements do not require revision but the entity refuses to revise or eliminate the material inconsistency, the auditors may
A. Issue a qualified opinion on the entity's financial statements, citing a departure from generally accepted accounting principles.
B. Consider the matter closed because the other information is not included in the audited financial statements.
C. Issue an adverse opinion on the entity's financial statements due to inadequate disclosure.
D. Revise the report on the entity's financial statements to include a separate explanatory paragraph describing the material inconsistency.
36.When auditors lack independence, which of the following is true about the report on the entity's financial statements that should be issued?
A. The auditors should disclaim an opinion and should state specifically that they are not independent.
B. The auditors should disclaim an opinion but not mention that they are not independent.
C. The auditors should issue an unqualified opinion with an explanatory paragraph stating that they are not independent.
D. The auditors should issue a qualified opinion with an explanatory paragraph stating that they are not independent.
37.In which of the following circumstances would a qualified opinion not be appropriate?
A. A scope limitation prevents the auditors from completing an important auditing procedure.
B. The entity has failed to properly disclose going-concern uncertainties.
C. An accounting principle at variance with generally accepted accounting principles is used.
D. The auditors lack independence with respect to the audited entity.
38.Auditors should disclose the substantive reasons for expressing an adverse opinion on the entity's financial statements in an additional paragraph
A. Preceding the scope paragraph.
B. Preceding the opinion paragraph.
C. Following the opinion paragraph.
D. In the footnotes to the financial statements.
39.When auditors qualify their opinion on the entity's financial statements because of inadequate disclosure, the auditors should describe the nature of the omission in an additional paragraph and modify the
A. Introductory and scope paragraphs.
B. Introductory paragraph only.
C. Scope paragraph only.
D. Neither the introductory or scope paragraph.
40.Restrictions imposed by an entity prohibited the auditors' observation of physical inventories, which accounted for 35% of total assets. Alternative auditing procedures were not feasible, although the auditors were able to examine satisfactory evidence for all other items in the financial statements. The auditors would most likely express
A. A qualified opinion on the entity's financial statements, referring to a departure from generally accepted accounting principles.
B. A disclaimer of opinion on the entity's financial statements.
C. An unqualified opinion on the entity's financial statements with a separate explanatory paragraph.
D. An unqualified opinion on the entity's financial statements with a modification of the scope paragraph.
41.If management fails to provide adequate justification for a change from one generally accepted accounting principle to another, the auditors should
A. Add an additional paragraph and express a qualified or an adverse opinion on the entity's financial statements for lack of conformity with generally accepted accounting principles.
B. Disclaim an opinion on the entity's financial statements because of uncertainty.
C. Disclose the matter in a separate explanatory paragraph but not modify the opinion paragraph on the entity's financial statements.
D. Neither modify the opinion on the entity's financial statements nor disclose the matter because both principles are generally accepted accounting principles.
42.Charlie Company's comparative financial statements include the financial statements of the prior year that were audited by predecessor auditors whose report on those financial statements is not presented. If the predecessor's report was qualified, the successor auditors should
A. Indicate in their report the substantive reasons for the qualification issued by the predecessor auditors.
B. Request the entity to reissue the predecessor's report on the prior-year statements.
C. Issue an updated comparative report on the entity's financial statements, indicating the division of responsibility.
D. Express an opinion only on the current-year financial statements and make no reference to the prior-year financial statements or opinion.
43.Auditors who are reporting on financial statements that contain a material departure from generally accepted accounting principles should include an additional paragraph and
A. Express a qualified or adverse opinion.
B. Not modify the opinion paragraph as long as the departure is adequately disclosed in a footnote.
C. Disclaim an opinion on the financial statements.
D. Express a qualified opinion or disclaimer of opinion.
44.Which of the following is an example of a material accounting change that requires recognition in an unqualified opinion on the entity's financial statements?
A. A change in the estimate of useful lives used to depreciate property, plant and equipment.
B. A change in the entity's form of reporting entity.
C. Management has changed from one generally accepted accounting principle to another but has not provided reasonable justification.
D. A change from an accounting principle that conforms with GAAP to one that does not.
45.Independent auditors must consider whether the entity has the ability to continue as a going concern. If a substantial doubt exists but disclosure is adequate and no other basis exists for modifying the report, the auditors would normally
A. Disclaim an opinion.
B. Express an adverse opinion.
C. Qualify the opinion.
D. Express an unqualified opinion with an additional paragraph describing the going-concern uncertainty.
46.Auditors most likely would issue a disclaimer of opinion on the entity's financial statements because of
A. Inadequate disclosure of material information.
B. The omission of the statement of cash flows.
C. A material departure from generally accepted accounting principles.
D. Management's refusal to furnish written representations.
47.When disclaiming an opinion due to a client-imposed scope limitation, auditors should indicate in a separate paragraph why the audit did not comply with the standards of the PCAOB. The auditors should also omit
A. The opinion paragraph.
B. The scope and opinion paragraph.
C. Neither the scope or opinion paragraph
D. The scope paragraph.
48.Under which of the following circumstances would a disclaimer of opinion on the entity's financial statements not be appropriate?
A. The financial statements fail to contain adequate disclosure of related-party transactions.
B. The entity refuses to permit its attorney to furnish information requested in an attorney letter.
C. The auditors are engaged after the date of the financial statements and are unable to observe physical inventories or apply alternative procedures to verify their balances.
D. The auditors are unable to determine the amounts associated with illegal acts committed by the entity's management.
49.When audited financial statements are presented in a document containing other information, the auditors should
A. Perform inquiry and analytical procedures to ascertain whether the other information is reasonable.
B. Add an explanatory paragraph to the auditors' report without modifying the opinion on the financial statements.
C. Perform the appropriate substantive procedures to corroborate the other information.
D. Read the other information to determine that it is consistent with the audited financial statements.
50.Reference in a group auditors' report to the fact that part of the audit of group financial statements was performed by component auditors most likely would be an indication of
A. Division of responsibility between the auditors who conducted the audits of the components of the group financial statements.
B. The portion of the group statements audited by the component auditors not being considered material.
C. Group auditors' recognition of the component auditors' competence, reputation, and professional certification.
D. Different opinions the auditors are expressing on the components of the financial statements that each audited.
51.The auditors include a separate paragraph in an otherwise unmodified report on the entity's financial statements to emphasize that the entity being reported on had significant transactions with related parties. The inclusion of this separate paragraph
A. Is considered a qualification of the opinion.
B. Violates generally accepted auditing standards if this information is already disclosed in footnotes to the financial statements.
C. Necessitates a revision of the opinion paragraph to include the phrase "with the foregoing explanation."
D. Is appropriate and would not otherwise affect the unqualified opinion.
52.When there has been a change in accounting principles but its effect on the comparability of the financial statements is not material, the auditors should
A. Refer to the change in an explanatory paragraph.
B. Explicitly concur that the change is preferred.
C. Not refer to consistency in the report.
D. Refer to the change in the opinion paragraph.
53.When financial statements contain a departure from GAAP because of unusual circumstances and the statements would otherwise be misleading, the auditors should explain the unusual circumstances in a separate paragraph and express an opinion that is
A. Unqualified.
B. Qualified.
C. Adverse.
D. Qualified or adverse, depending on the overall materiality and pervasiveness of the GAAP departure.
54.In which of the following circumstances would auditors be most likely to express an adverse opinion?
A. The chief executive officer refuses to provide the auditors access to minutes of the board of directors' meetings.
B. Tests of controls show that the entity's internal control is so ineffective that it cannot be relied upon.
C. The financial statements are not in conformity with generally accepted accounting principles regarding the capitalization of leases.
D. Information comes to the auditors' attention that raises substantial doubt about the entity's ability to continue as a going concern.
55.In which of the following circumstances would auditors most likely add an explanatory paragraph to the standard report without affecting the unqualified opinion on the entity's financial statements?
A. The auditors are asked to report on the balance sheet but not on the other basic financial statements.
B. There is substantial doubt about the entity's ability to continue as a going concern.
C. Management's estimates of the effects of future events on the entity's financial condition, results of operations, and cash flows are unreasonable.
D. Certain transactions cannot be tested because of management's records retention policy.
56.C. Green, CPA, was engaged to audit the financial statements of Essex Co. after its fiscal year had ended. The timing of Green's appointment and the start of fieldwork made confirming accounts receivable by direct communication with the customers not feasible. However, Green applied other procedures and was satisfied as to the reasonableness of the account balances. Green's auditors' report most likely contained a(n)
A. Unqualified opinion.
B. Unqualified opinion with an explanatory paragraph.
C. Qualified opinion due to a scope limitation.
D. Qualified opinion due to a departure from generally accepted auditing standards.
57.In which of the following situations would auditors ordinarily choose between expressing a qualified opinion or an adverse opinion on the entity's financial statements?
A. The auditors did not observe the entity's physical inventory and are unable to become satisfied as to its balance by other auditing procedures.
B. The financial statements fail to disclose information that is required by generally accepted accounting principles.
C. The auditors are asked to report only on the entity's balance sheet but not on the other basic financial statements.
D. Events disclosed in the financial statements cause the auditors to have substantial doubt about the entity's ability to continue as a going concern.
58.The auditors conclude that an entity's illegal act, which has a material effect on the financial statements, has not been properly accounted for or disclosed. Depending on the overall materiality and pervasiveness of the effect of this illegal act on the financial statements, the auditors should express either a(n)
A. Adverse opinion or a disclaimer of opinion.
B. Qualified opinion or adverse opinion.
C. Disclaimer of opinion or an unqualified opinion with a separate explanatory paragraph.
D. Unqualified opinion with a separate explanatory paragraph or a qualified opinion.
59.Auditors would not normally issue a qualified opinion on the entity's financial statements when
A. An accounting principle at variance with generally accepted accounting principles is used.
B. The auditors lack independence with respect to the audited entity.
C. A scope limitation prevents the auditors from completing an important auditing procedure.
D. The entity has undertaken a change in accounting principle with which the auditor does not agree.
60.Which of the following phrases would auditors most likely include in their report when expressing a qualified opinion on the entity's financial statements because of inadequate disclosure?
A. "Subject to the departure from generally accepted accounting principles, as described above."
B. "With the foregoing explanation of these omitted disclosures."
C. "Except for the omission of the information discussed in the preceding paragraph."
D. "Does not present fairly in all material respects."
61.If the auditors obtain sufficient appropriate evidence on the entity's accounts receivable balance by using alternative procedures because it is impracticable to confirm accounts receivable, the opinion on the entity's financial statements should be unqualified and would
A. Disclose the fact that alternative procedures were used due to client-imposed scope limitation.
B. Disclose in the opinion paragraph that confirmation of accounts receivable was impracticable.
C. Not mention the alternative procedures.
D. Include an explanatory paragraph that discloses the performance of alternative procedures.
62.When reporting on comparative financial statements, auditors ordinarily should modify their previously expressed opinion on the prior-year financial statements if the
A. Prior-year financial statements are restated to conform with generally accepted accounting principles.
B. Auditors were predecessor auditors who have been requested by a former client to reissue the previous report.
C. The prior-year opinion was unqualified and the opinion on the current-year financial statements is modified due to a lack of consistency.
D. The prior-year financial statements are restated following an acquisition in the current year.
63.How would the auditors' opinion on the entity's financial statements be affected if a material weakness in internal control over financial reporting is identified?
A. The auditors would need to disclaim an opinion on the entity's financial statements.
B. The auditors would need to issue either a qualified or an adverse opinion on the entity's financial statements, depending on the significance of the material weakness.
C. The auditors' opinion on the entity's financial statements would not be affected by the material weakness, assuming sufficient appropriate evidence has been obtained.
D. The auditors would need to withdraw from the engagement and would not issue an opinion or other form of assurance on the financial statements.
64.When reporting under GAAS, certain statements are required in all auditors' reports ("explicit") and others are required only under certain conditions ("implicit"). Which combination that follows correctly describes the auditors' responsibilities for reporting?
A. Option A
B. Option B
C. Option C
D. Option D
65.Auditors found that the entity has not capitalized a material amount of leases in the financial statements. When considering the overall materiality of this departure from GAAP, the auditors would choose which reporting options?
A. Unqualified opinion or disclaimer of opinion.
B. Unqualified opinion or qualified opinion.
C. Explanatory paragraph with unqualified opinion or an adverse opinion.
D. Qualified opinion or adverse opinion.
66.The auditors determined that the entity is suffering financial difficulty and the going-concern status is seriously in doubt. Assuming the entity adequately disclosed this matter in the financial statements, the auditors must choose between which of the following auditors' report alternatives?
A. Unqualified opinion with a going-concern explanatory paragraph or disclaimer of opinion.
B. Standard report or a disclaimer of opinion.
C. Qualified opinion or adverse opinion.
D. Standard report or adverse opinion.
67.An entity accomplished an early extinguishment of debt and the auditors believe that literal application of GAAP would cause recognition of a loss that would materially distort the financial statements and cause them to be misleading. Given these facts, the auditors would probably choose which reporting option?
A. Explain the situation and issue an adverse opinion.
B. Explain the situation and issue a disclaimer of opinion.
C. Explain the situation and issue an unqualified opinion, relying on Rule 203 of the AICPA Code of Professional Conduct.
D. Issue the standard report.
68.Which of these situations would require auditors to append an explanatory paragraph about consistency to an otherwise unqualified opinion?
A. Entity changed its estimated allowance for uncollectible accounts receivable.
B. Entity corrected a prior mistake in accounting for interest capitalization.
C. Entity sold one of its subsidiaries and consolidated six subsidiaries this year compared to seven last year.
D. Entity changed its inventory costing method from FIFO to LIFO.
69.R. Wolfe became the new auditor for Royal Corporation, succeeding C. Mason, who audited the financial statements last year. Wolfe needs to report on Royal's comparative financial statements and should disclose in the report an explanation about other auditors having audited the prior year
A. Only if Mason's opinion last year was qualified.
B. Describing the prior audit and the opinion but not naming Mason as the predecessor auditor.
C. Describing the audit but not revealing the type of opinion Mason gave.
D. Describing the audit and the opinion and naming Mason as the predecessor auditor.
70.When other independent auditors are involved in the current audit of parts of the entity's business, the group auditors may issue a report that
A. Mentions the component auditors, describes the extent of the component auditors' work, and expresses an unqualified opinion.
B. Does not consider or evaluate the component auditors' work, but expresses an unqualified opinion in a standard report.
C. Places primary responsibility for the reporting on the component auditors.
D. Names the component auditors, describes their work, and presents only the group auditors' report.
71.When auditors wish to issue an unqualified opinion but highlight that the entity changed its method of accounting for software development costs, what type of report modification would be most appropriate?
A. Identify the change in accounting methods in the introductory paragraph.
B. Identify the change in accounting methods in the opinion paragraph.
C. Identify the change in accounting methods in an emphasis-of-matter paragraph.
D. Identify the change in accounting methods in an other-matter paragraph.
72.Under which of the following conditions can a disclaimer of opinion never be issued?
A. The entity's going-concern problems are highly material and pervasive.
B. The entity does not allow the auditors access to evidence about important accounts.
C. The auditors own stock in the entity.
D. The auditors have determined that the entity uses the NIFO (next-in, first-out) inventory costing method.
73.How is the auditors' own responsibility for expressing the opinion on financial statements disclosed in the report?
A. Stated explicitly in the introductory paragraph of the standard report.
B. Unstated but understood in the introductory paragraph of the standard report.
C. Stated explicitly in the opinion paragraph of the standard report.
D. Stated explicitly in the scope paragraph of the standard report.
74.Company A hired Samson & Delilah, CPAs, to audit the financial statements of Company B and deliver the report to Megabank. Who is the client?
A. Megabank.
B. Samson & Delilah.
C. Company A.
D. Company B.
75.Which of the following is not included in the standard report on the financial statements?
A. An identification of the financial statements that were audited.
B. A general description of an audit.
C. An opinion that the financial statements present financial position in conformity with GAAP.
D. An explanatory paragraph commenting on the effect of economic conditions on the entity.
76.If the auditors decide to present separate reports on the entity's financial statements and internal control over financial reporting, which of the following reports should be modified to refer to the other report?
A. Option A
B. Option B
C. Option C
D. Option D
77.Which of the following would cause the auditors to issue a report on the entity's financial statements other than a standard report?
A. The financial statements present fairly the financial condition of the entity.
B. The entity omitted a necessary footnote from the financial statements.
C. There were no unusual issues related to the conduct of the audit.
D. The auditors do not need to highlight any entity transactions or events.
78.Which of the following is not included in the introductory paragraph of the standard report on the entity's financial statements?
A. The names of the financial statements audited.
B. The auditors' responsibility to express an opinion on the entity's financial statements.
C. Management's responsibility for the financial statements.
D. The fact that an audit provides a reasonable basis for an opinion.
79.Which of the following is not included in the scope paragraph of the standard report on the entity's financial statements?
A. A conclusion that the financial statements are in conformity with U.S. GAAP.
B. A statement that the audit was conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States).
C. The fact that an audit includes assessing the accounting principles used by the entity.
D. The fact that the auditors planned and performed the audit to obtain reasonable assurance that the financial statements are free of material misstatement.
80.In a standard report, which of the following paragraphs indicates that auditors conducted their audits in accordance with standards of the PCAOB?
A. Introductory paragraph.
B. Scope paragraph.
C. Opinion paragraph.
D. Additional paragraph.
81.When auditors render an adverse opinion on the entity's financial statements, the
A. Introductory and scope paragraph should not be modified.
B. Auditors do not possess all necessary evidence.
C. Departures do not need to be explained in the auditors' report.
D. Auditors require less evidence to support the opinion.
82.If financial statements contain an immaterial departure from accounting principles, the auditors can render a(n)
A. Qualified opinion.
B. "Subject to" opinion.
C. Unqualified opinion.
D. Unqualified opinion with explanatory paragraph.
83.If a going-concern uncertainty exists, auditors may not issue which of the following reports on the entity's financial statements?
A. An unqualified opinion with an additional paragraph explaining the goingconcern problem.
B. An adverse opinion because of a pervasive departure from GAAP.
C. A disclaimer of opinion resulting from an uncertainty about the ability of the entity to continue in existence.
D. An opinion qualified for a GAAP departure if the auditors believe the disclosures about going-concern problems are inadequate.
84.Which of the following report modifications would not be necessary if group auditors indicate a division of responsibility?
A. A reference to component auditors' work in the introductory paragraph.
B. A reference to the report of component auditors providing a basis for the opinion in the scope paragraph.
C. A reference to the report of component auditors in the opinion paragraph.
D. An additional paragraph summarizing the components (and dollar and percentage magnitudes of the components) examined by component auditors.
85.If the auditors encounter a material scope limitation in the examination of an entity's financial statements, which of the following types of opinions could be issued?
A. Adverse opinion or disclaimer of opinion.
B. Adverse opinion or qualified opinion.
C. Unqualified opinion with explanatory language or qualified opinion.
D. Disclaimer of opinion or qualified opinion.
86.If the auditors present a combined report on an entity's financial statements and internal control over financial reporting, in which paragraph of the report is the opinion on the entity's financial statements shown?
A. Introductory paragraph.
B. Scope paragraph.
C. Opinion paragraph.
D. Explanatory paragraph.
Fill in the Blank Questions
87.The _____________________________ paragraph of the auditors' report on the entity's financial statements indicates that an audit has been conducted and identifies the financial statements the auditors examined.
88.The opinion paragraph of the standard report on the entity's financial statements identifies and describes omitted or inadequate
89.When a scope limitation exists and the auditors have not been able to obtain sufficient appropriate evidence on a particular account balance or disclosure, the auditors must choose between a(n) _____________________________ opinion and a(n) _____________________________ of opinion on the entity's financial statements.
90.When a GAAP departure is pervasive, affecting numerous accounts and financial statement relationships, the auditors must issue a(n) ______________ opinion on the entity's financial statements.
91.The _____________________________ paragraph indicates the character of auditors' work in the examination of the entity's financial statements.
92.A(n) ________________________ is a situation in which auditors are unable to gather sufficient appropriate evidence.
93.When the auditors lack independence, a(n) ______________________________________ is issued on the fairness of the entity's financial statements.
94.Rule 203 provides for the possibility that adherence to a pronouncement of the FASB might create _____________________________ financial statements.
95.A(n) ____________________________ scope limitation represents a situation in which management refuses to permit auditors to perform certain auditing procedures or examine certain evidence.
96.If a departure from GAAP is material (but not pervasive), a(n) _____________________________ opinion on the entity's financial statements should be issued.
97.Changing from one GAAP method to another GAAP method may require auditors to modify their report because of matters related to the _____________________________ of the accounting principles used to prepare the entity's financial statements.
98.When auditors issue a report on the current-year financial statements shown in comparative form, they should _____________________________ the report they previously issued on the prior-year financial statements.
99.When indicating a division of responsibility in the audit of ___________________________________, the group auditors may choose to refer to the work of component auditors in their report.
100.Auditors' addition of one or more paragraph(s) to a report on the entity's financial statements to highlight information to users that does not affect the opinion on the financial statements is referred to as
101.Auditors' opinion begins with "We were engaged to audit . . ." when auditors issue a(n) _______________________________________.
102.Auditors' decision to select between a qualified opinion or adverse opinion for a departure from GAAP would depend upon the materiality and __________________________ of the effects of the departure.
103.When reporting on _____________________________________, auditors should indicate that these statements have been derived from the complete set of financial statements, which have been audited.
104.The situation in which predecessor auditors allow a previously issued report to be used but have not conducted any auditing procedures to verify that this report is still appropriate is referred to as a(n) _____________________________ report.
105.An engagement in which auditors express opinions on both the client's financial statements and internal control over financial reporting are referred to as a(n) _____________________________________.
106.When presenting reports on the entity's financial statements and internal control over financial reporting, the auditors can present separate reports or a(n) ______________________ report.
Short Answer Questions
107.In each of the following circumstances, indicate by appropriate letter which of the following types of opinions should be rendered on the entity's financial statements.
A. Unqualified
B. Qualified
C. Adverse
D. Disclaimer
____ 1. Departure from generally accepted accounting principles that is material but not pervasive.
____
2. Going-concern uncertainties that may have a material (but not pervasive) effect on the financial statements.
____
____
____
3. Emphasis of a matter, no GAAP departure.
4. Material but not pervasive scope limitation.
5. Material and pervasive departure from GAAP.
108.For each of the following sentences or phrases, indicate by letter in which paragraph of the standard report on the entity's financial statements the sentence or phrase would appear.
A. Introductory
B. Scope
C. Opinion
____ 1. "Our responsibility is to express an opinion on these financial statements based on our audits."
____ 2. "The financial statements referred to above present fairly, in all material respects, the financial position of...."
____
3. "We have audited the accompanying consolidated balance sheets of...."
____ 4. "We believe that our audits provide a reasonable basis for our opinion."
____ 5. "We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States)."
109.For each of the following situations, indicate by letter the type of report most likely to be issued.
A. Unqualified opinion, no modification.
B. Unqualified opinion, explanatory paragraph for consistency.
C. Unqualified opinion, explanatory paragraph for Rule 203.
D. Unqualified opinion, explanatory paragraph for emphasis of a matter.
E. Unqualified opinion, explanatory paragraph for a going-concern uncertainty.
F. Qualified opinion.
G. Disclaimer of opinion
____ 1. The entity has a lawsuit pending against it. There is significant uncertainty about the outcome of the lawsuit, which could have a highly material impact on the viability of the entity. Management has provided adequate disclosure of the lawsuit in the footnotes accompanying the financial statements.
____ 2. The entity has a lawsuit pending against it and it is probable that the entity will lose the suit. Management has accrued the best estimate of the loss and provided adequate disclosure. It is not expected that this lawsuit will have a significant effect on the entity's ability to continue as a going concern.
____ 3. The entity has a lawsuit pending against it and it is probable that the entity will lose the suit. Management has not accrued the best estimate of the loss but has provided information in the footnotes. It is not expected that this lawsuit will have a significant effect on the entity's ability to continue as a going concern.
____ 4. Based on recent analysis of usage, the entity has changed the useful life of its office equipment from five to four years. This change is reflected in the depreciation amounts computed for the current year.
____ 5. The entity uses an accounting principle for a class of transactions that is not acceptable under current GAAP. The entity believes and the auditors concur that the financial statements would be misleading if GAAP were to be followed.
110.For each of the following words and phrases from the auditors' standard report on the entity's financial statements, indicate by letter in which paragraph of the standard report they should appear:
A. Introductory
B. Scope
C. Opinion
____ 1. "Audit provides a reasonable basis for an opinion."
____ 2. "Present fairly, in all material respects."
____ 3. "Our responsibility is to express an opinion."
____ 4. "Perform the audit to obtain reasonable assurance."
____ 5. "In conformity with accounting principles generally accepted in the United States of America."
____ 6. "Responsibility of the entity's management."
____ 7. "Results of its operations and its cash flows."
____ 8. "Conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board."
____ 9. "Assessing the accounting principles used."
____ 10. "The accompanying balance sheet."
111.Assume that auditors prepare separate reports on the entity's financial statements and internal control over financial reporting. Following are various phrases and characteristics associated with auditors' reports. For each phrase or characteristic, indicate by letter whether the phrase or characteristic is related to the report on the entity's financial statements, report on the entity's internal control over financial reporting, both reports, or neither report.
A. Report on entity's financial statements.
B. Report on internal control over financial reporting.
C. Both reports.
D. Neither report.
____ 1. "Conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States)."
____ 2. "Auditors are responsible for expressing an opinion."
____ 3. "Evaluates management's assessment included in their accompanying report."
____ 4. "Defines inherent limitations of internal control over financial reporting."
____ 5. "Report is dated as of the audit completion date."
____ 6. "Report identifies management's responsibility for the entity's financial statements."
____ 7. "Engagement provides absolute assurance."
____ 8. "Report provides explicit indication that auditors are independent."
____ 9. "Scope limitations may result in a disclaimer of opinion or a qualified opinion."
____ 10. "Report indicates that degree of compliance with policies or procedures may change."
112.Indicate the type of report on the entity's financial statements that would be required for each of the following circumstances. Assume any amount in question is material on an overall basis (but not pervasive) unless otherwise stated.
Essay Questions
113.Following are two independent situations.
A. Grinner and Greeter, CPAs, were engaged to perform an audit of the financial statements of Happy, Inc. Happy's management would not allow Grinner and Greeter to confirm any of the accounts receivable. All other auditing procedures were performed as considered necessary by Grinner and Greeter and no issues were encountered. However, Grinner and Greeter were unable to satisfy themselves with regard to the balance in accounts receivable.
B. Tick and Tie, CPAs, were performing their annual audit of Johnson Manufacturing Company. Johnson is currently being sued for $2,000,000 related to an alleged defective product that they sold to a customer. Johnson's legal counsel has told Tick and Tie that it is probable that Johnson will lose the suit and have to pay the entire $2,000,000. Johnson's management has included information in the footnotes about the lawsuit. However, they have not recorded any loss or liability in the income statement or balance sheet.
Required:
For each of the two independent situations, state what type of opinion should be issued on the company's financial statements. Briefly explain your rationale. Finally, state which paragraphs, if any, of the standard report would be modified.
114.Why must auditors issue a report when they are associated with financial statements? What guidelines are provided for situations in which auditors lack independence with respect to the client?
115.Murray & Co., CPAs, completed the audit of Classic, Inc., a public entity, on March 1, 2013 for a January 31, 2013 fiscal year-end. The audit team encountered no significant issues and found no material misstatements. Murray & Co. has audited Classic, Inc., for several years, and past audits did not reveal any significant issues or material misstatements. The audit team partner determined that a standard report on Classic's financial statements was appropriate. The auditors' report, drafted by I.M. Nu, a staff assistant, follows.
We have audited the accompanying consolidated balance sheets of Classic, Inc. and subsidiaries as of January 31, 2013, and 2012, the related consolidated statements of shareholders' equity, and cash flows for each of the years in the three-year period ended January 31, 2013. These financial statements are the responsibility of Classic, Inc.'s management.
We conducted our audits in accordance with the Statements on Auditing Standards issued by the Auditing Standards Board of the American Institute of Certified Public Accountants. Those standards require that we plan and perform the audit to obtain absolute assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the internal controls, accounting principles used, and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide an unconditional basis for our opinion.
In our opinion, the financial statements referred to above correctly show the financial position of Classic, Inc. and consolidated subsidiaries at January 31, 2013 and 2012, and the results of their operations for the years then ended.
Required:
Identify the deficiencies and errors in the draft report. Do not rewrite the report, but be specific as to what is incorrect or omitted. Organize your answer by paragraph.