Deck 15: Audit Reports on Financial Statements

Question 1

The audit report delineates the responsibility of client management and that of the audit firm.

Answer 1

True

Question 2

For the last several years,both the Financial Accounting Standards Board (FASB)and the International Auditing and Assurance Standards Board (IAASB)have been considering possible changes to the standard unqualified audit report.

Answer 2

False

Question 3

The term "except for" is used in the opinion paragraph of an audit report that will be qualified for a GAAP violation that is not pervasive.

Answer 3

True

Question 4

There are no differences in audit report requirements across the standards of the AICPA,PCAOB,and IAASB.

Question 5

A justified departure from GAAP will result in the issuance of an adverse opinion.

Question 6

The audit report can be a verbal presentation to the audit committee about the client.

Question 7

An important component of an audit report is that the title includes the word "competent."

Question 8

When there is an uncertainty surrounding the financial statements,the auditor may still be able to give an unqualified opinion.

Question 9

An unqualified audit opinion with an explanatory paragraph often makes reference to the footnotes of the financial statements

Question 10

A client that has a departure from generally accepted accounting principles that is immaterial will receive a qualified or adverse opinion.

Question 11

The auditor should only provide an opinion on the financial statements if the opinion indicates that the financial statements are fairly stated in all material respects.

Question 12

The audit report is modified to five paragraphs as a result of another audit firm performing part of the financial statement audit.

Question 13

A client that treats a material lease transaction as an operating lease when it is in fact a capital lease has deviated from GAAP and will receive a qualified or adverse opinion.

Question 14

Andrews Corporation adopted an accounting principle that is a material departure from GAAP.The auditor determined that the financial statements are fairly presented,except for this specifically identifiable GAAP departure,and therefore would issue a disclaimer of opinion.

Question 15

Under international auditing standards,when the audit client has engaged other audit firms to audit remote locations around the country,the principal auditor must mention the other audit firms in the audit report.

Question 16

When financial statements contain generally accepted accounting principles in the current year that are different from the generally accepted accounting principles used in the preceding year,the auditor will typically make mention of it in the opinion.

Question 17

For some engagements,the financial statements might be audited in accordance with multiple auditing standards.

Question 18

An auditor is not required to tell the reader of an audit report when there has been a change in accounting principles that materially affects the financial statements.

Question 19

After the balance sheet date but prior to the audit report date the client decides to acquire Bargain Company to obtain a significant increase in revenues.The auditor would probably give a report that includes the statement: "except for the acquisition of Bargain Company...".

Question 20

The substantial doubt about an entity's ability to continue as a going concern is a phrase that is used in an unqualified opinion with a certain type of explanatory language.

Question 21

The auditor will issue an unqualified opinion on ICFR if the auditor has identified only one material weakness in ICFR.

Question 22

The auditor is only concerned about the aggregate internal control deficiencies when determining the appropriate opinion on internal control over financial reporting (ICFR).

Question 23

For a change in accounting principles that management does not justify to the auditor,the auditor will likely choose between a qualified and an adverse opinion.

Question 24

If the auditor concludes that the financial statements taken as a whole are not fairly presented,the auditor should issue an adverse opinion.

Question 25

The failure of a client to include a statement of cash flows will result in the issuance of a disclaimer of opinion by the auditor.

Question 26

When the auditor is unable to obtain sufficient,appropriate evidence concerning the beginning inventory,which is material,the report is modified by adding an explanatory paragraph prior to the opinion paragraph and appropriate modification to the scope paragraph.

Question 27

Inconsistent application of accounting principles by the client is a GAAP violation and would result in a qualified audit report.

Question 28

Uncertainties,such as doubt about the going concern of a client,may result in an adverse opinion.

Question 29

Restrictions on the scope of the audit whether imposed by the client or circumstances may require the auditor to issue either a qualified or an adverse opinion.

Question 30

If a significant scope limitation is imposed by the client,a disclaimer should ordinarily be issued.

Question 31

Because of its importance,the decision about what type of opinion to issue is often made after consultation with other professionals within the firm.

Question 32

An auditor can issue a disclaimer of opinion because of an inability to obtain sufficient appropriate evidence.

Question 33

If the firm auditing a company realizes that it is not independent with respect to the client,it will issue disclaimer of opinion based on the inherent GAAP violation imposed by the audit firm.

Question 34

For a client with serious going concern issues the auditor has to make a choice between issuing an unqualified audit report with an explanatory paragraph or a disclaimer.

Question 35

If scope limitations that are not client-imposed exist make it impossible for the auditor to form an opinion,the auditor should render an adverse opinion.

Question 36

The scope paragraph of an unqualified opinion primarily provides information relating to the division of responsibilities.

Question 37

The most difficult decisions about which opinion to issue are generally centered around decisions based on the materiality level and pervasiveness of GAAP violations,the significance of scope limitations,and the likelihood of the entity being a going concern.

Question 38

When circumstances preclude an auditor from performing certain procedures and the auditor can be satisfied using other alternative procedures,a disclaimer of opinion will be rendered.

Question 39

The client will not allow Collier and Company,CPAs to read the minutes of the board of director's meetings that occurred during the year under audit.Such a limitation will usually result in the auditor issuing a disclaimer.

Question 40

The auditor will modify the audit report on ICFR effectiveness when management's annual certification pursuant to Section 302 of the Sarbanes-Oxley Act is misstated.

Question 41

The use of another CPA firm by an audit firm to perform part of the engagement on a client's subsidiary will require the audit firm to do which of the following?

A)Merge with the other CPA firm.
B)Perform a peer review on the other CPA firm.
C)Ensure the independence of the other CPA firm of the client.
D)List the other firm in the footnotes to the client's financial statements.

Question 42

Auditing reporting standards for financial statement and integrated audits require auditors to provide which of the following?

A)Positive assurance.
B)Negative assurance.
C)Materiality assurance.
D)No assurance.

Question 43

Audit reports are designed to promote clear communication between the auditor and the financial statement user.Which of the following is not delineated in the audit report?

A)What was audited and the relative responsibilities of the client and the auditor.
B)The experience level of the audit team.
C)The nature of the audit opinion formulation process.
D)The auditor's opinion on the fairness of the financial statements.

Question 44

In which one of the following instances would an auditor most likely issue a standard unqualified opinion without explanatory language?

A)Management's disclosures are missing or inadequate.
B)There is substantial doubt about the entity's ability to continue as a going concern.
C)There is a significant limitation on the scope of the engagement.
D)There is an immaterial deviation from GAAP related to capitalizing repairs.

Question 45

According to the AICPA,the auditor needs to form an opinion on the financial statements based on an evaluation of the audit evidence obtained.This is stated in which AICPA principle governing an audit conducted in accordance with GAAS?

A)Principle 1
B)Principle 4
C)Principle 5
D)Principle 7

Question 46

If the auditor believes that there is a remote probability that resolution of an uncertainty will have a material effect on the financial statements,which of the following would the auditor issue?

A)A disclaimer of opinion.
B)A standard unqualified opinion.
C)An adverse opinion.
D)An unqualified opinion with explanatory paragraphs.

Question 47

According to the AICPA principles,which of the following is incorrect?

A)If the auditor has reservations about the fairness of financial statement presentation,the reason(s)must be stated in the auditor's report.
B)If there is a material departure from GAAP in the financial statements,the auditor should explicitly state the nature of the departure and the dollar effects where determinable.
C)Auditors should state the reasons why an unqualified opinion cannot be issued.
D)Auditors should issue an unqualified opinion in all cases where companies have provided an entire set of financial statements and footnotes that include all years presented for comparative purposes.

Question 48

Which of the following is a change that is not being debated by auditing standard setters and investors?

A)Adding disclosure about which engagement partner at the firm supervised the audit and who from outside the audit firm participated in the audit
B)Adding commentary on areas of risk of material misstatement of the financial statements identified by the auditor.
C)Adding commentary about the level of materiality applied by the auditor to perform the audit.
D)All of the above are being debated.

Question 49

If the auditor determines that management's annual report on internal controls is incomplete or not properly presented,the auditor's report will include an explanatory paragraph that describes the reasons for this determination.

Question 50

When financial statements contain a material,unjustified departure from GAAP,which of the following is contained in the audit report?

A)A Qualification: Yes; An Explanatory Paragraph After the Opinion Paragraph: No.
B)A Qualification: Yes; An Explanatory Paragraph After the Opinion Paragraph: Yes.
C)A Qualification: No; An Explanatory Paragraph After the Opinion Paragraph: Yes.
D)A Qualification: No; An Explanatory Paragraph After the Opinion Paragraph: No.

Question 51

The scope paragraph of an unqualified opinion primarily gives information relating to which of the following?

A)The division of responsibilities.
B)The final assessment of a company's standings with the audit firm.
C)The statements and dates under audit.
D)Audit planning and procedure.

Question 52

If the auditor decides to draw attention to large related party transactions occurring in the financial statements of the client,which report will most likely be issued?

A)Qualified.
B)Unqualified with an explanatory paragraph
C)Adverse.
D)Consolidation.

Question 53

The decision about whether to make reference to another auditor in the report on the audit of ICFR does not differ from the corresponding decision as it relates to the audit of the financial statements.

Question 54

Which one of the following is not a type of unqualified audit opinion issued by auditors?

A)Standard with three paragraphs.
B)Includes explanatory paragraph.
C)Includes modifications.
D)Does not include the opinion paragraph.

Question 55

Which one of the following is an instance where the auditor would add a paragraph after the opinion paragraph?

A)There is serious doubt that the client can continue as a going concern.
B)Management's disclosures are not adequate.
C)There are significant uncertainties that are not properly disclosed in the footnotes.
D)There is a material dollar misstatement in the financial statements.

Question 56

Which one of the following is an example of the contents of an opinion paragraph found in an audit report?

A)"We have audited...."
B)"Nothing came to our attention..."
C)"The financial statements referred to above present fairly,..."
D)"An audit includes examining,on a test basis..."

Question 57

According to the AICPA,the auditor needs to clearly express an opinion based on audit evidence obtained in the form of a written report.This is stated in which AICPA principle governing an audit conducted in accordance with GAAS?

A)Principle 1
B)Principle 4
C)Principle 5
D)Principle 7

Question 58

A client company has a history of negative cash flow trends and continuing losses.Which type of opinion will the auditor most likely issue?

A)Adverse.
B)Unqualified with explanatory language.
C)Qualified.
D)Disclaimer of opinion.

Question 59

The division of responsibility between the reporting company's management and the audit firm is described in which one of the following?

A)Scope paragraph.
B)Introductory paragraph.
C)Notes to the financial statements.
D)Opinion paragraph.

Question 60

When the financial statements contain a material departure from GAAP that the auditor believes is justified,where should the justification appear?

A)In a footnote.
B)In a paragraph added before the scope paragraph.
C)In the opening paragraph.
D)In a paragraph added before the opinion paragraph.

Question 61

If a client expensed the acquisition cost of some assets that should have been capitalized and depreciated them over their useful lives,which of the following would be incorrect?

A)A qualified opinion would be appropriate.
B)The opinion paragraph should be modified to include language such as: "except for the effects of not capitalizing the acquisition costs of some assets..."
C)An explanatory paragraph should include the effects of the subject matter of the qualification,where practicable.
D)An explanatory paragraph should be modified to include language such as: "subject to the qualified act..."

Question 62

In the audit of consolidated financial statements under U.S.auditing standards when more than one CPA firm is involved and the principal audit firm chooses to mention the other firm(s),the wording of which paragraph(s)is modified?

A)Introductory Paragraph: No; Scope Paragraph: No; Opinion Paragraph: Yes.
B)Introductory Paragraph: No; Scope Paragraph: Yes; Opinion Paragraph: Yes.
C)Introductory Paragraph: Yes; Scope Paragraph: Yes; Opinion Paragraph: Yes.
D)Introductory Paragraph: Yes; Scope Paragraph: Yes; Opinion Paragraph: No.

Question 63

Adverse opinions can only be issued by auditors based on which of the following?

A)Violations of GAAP.
B)Scope limitations.
C)Going concern.
D)Lack of independence.
E)Either B or D.

Question 64

In which of the following circumstances would an auditor be most likely to express an adverse opinion on a company's financial statements?

A)The client has had significant transactions with related entities that the auditor wants to emphasize.
B)The financial statements are not in conformity with FASB requirements regarding the capitalization of leases.
C)The auditor is not independent.
D)There is substantial doubt about the entity's ability to continue as a going concern.

Question 65

When the auditor wishes to emphasize a matter in the financial statements,which of the following would the audit report contain?

A)A Qualification: Yes; An Explanatory Paragraph After the Opinion Paragraph: No.
B)A Qualification: Yes; An Explanatory Paragraph After the Opinion Paragraph: Yes.
C)A Qualification: No; An Explanatory Paragraph After the Opinion Paragraph: Yes.
D)A Qualification: No; An Explanatory Paragraph After the Opinion Paragraph: No.

Question 66

In which one of the following instances would an auditor most likely issue a disclaimer of opinion?

A)Management will not sign a management representation letter.
B)Management declines to provide a statement of cash flow.
C)The auditor is independent of the client.
D)The auditor is unable to confirm receivables but performs alternative procedures.

Question 67

Which of the following phrases should not be used when the auditor is qualifying the audit opinion?

A)Except for.
B)Subject to.
C)With the exception of.
D)With the qualification of.

Question 68

Which of the following would not result in an unqualified audit report with an explanatory paragraph?

A)Going concern issue.
B)Scope limitation.
C)Emphasis of a matter.
D)Consistency of presentation.

Question 69

In which one of the following cases would an auditor most likely issue a qualified opinion?

A)There is a highly material,and very pervasive departure from SFAS No.141 and No.142.
B)There is a change in accounting principles promulgated by the FASB.
C)There is an immaterial dollar misstatement on the financial statements.
D)There is one material departure from GAAP that is affects only two accounts.

Question 70

In which one of the following instances would an auditor most likely issue an adverse opinion?

A)Management declines to present earnings per share in the income statement.
B)There is substantial doubt about the entity's ability to continue as a going concern.
C)There is a material dollar misstatement that overshadows the overall financial statements.
D)The client does not allow the auditor to send confirmations to its three largest customers.

Question 71

The opinion paragraph of the audit report for Schnook Co.states that the financial statements "do not present fairly".Which type of audit report is this?

A)Improper.
B)Adverse.
C)Disclaimer.
D)Qualified.

Question 72

Qualified opinions can only be issued by auditors for which of the following?

A)Violations of GAAP.
B)Scope limitations.
C)Going concern.
D)Lack of independence.
E)Either A and B.

Question 73

An audit of the Flagler Company,a diamond mining company,brings to light the fact that its equipment has been marked up to the owners' expectation of market values.Such a situation will most likely result in which type of report?

A)Disclaimer.
B)Review.
C)Adverse.
D)Unqualified with explanatory language.

Question 74

When the auditor is unable to obtain sufficient appropriate evidence because the client did not allow a procedure to be completed,which of the following would the report most likely contain?

A)A Qualification: Yes; An Explanatory Paragraph After the Opinion Paragraph: No.
B)A Qualification: Yes; An Explanatory Paragraph After the Opinion Paragraph: Yes.
C)A Qualification: No; An Explanatory Paragraph After the Opinion Paragraph: Yes.
D)A Qualification: No; An Explanatory Paragraph After the Opinion Paragraph: No.

Question 75

When an auditor issues an adverse opinion,which of the following should be included in the opinion paragraph?

A)The financial statement effects of the departure from GAAP.
B)A statement that indicates that the financial statements are fairly stated except for a reason that is described in the separate paragraph.
C)A reference to a separate paragraph that describes the reason for the adverse opinion.
D)The reasons that the financial statements are misleading.

Question 76

How would the auditor categorize a situation when the financial statements do not contain a footnote the auditor believes is necessary for fair presentation?

A)A scope limitation.
B)An uncertainty.
C)A departure from GAAP.
D)An act discreditable.

Question 77

Adverse opinions affect the standard audit report in which of the following ways?

A)Modifying the scope paragraph.
B)Adding an explanatory paragraph before the opinion paragraph.
C)Modifying the opinion paragraph to read " does not present fairly."
D)Both B and C.
E)All of the above.

Question 78

Which of the following is an example of circumstances that would not limit the audit scope?

A)An inadequacy in the accounting records.
B)The inability to gather sufficient competent evidence.
C)Emphasis of an important matter.
D)The timing of the fieldwork.

Question 79

When an auditor is faced with a material departure from GAAP that is pervasive,which of the following should the audit report contain?

A)An unqualified opinion.
B)A qualified opinion with an explanatory paragraph.
C)An adverse opinion.
D)A disclaimer of opinion.

Question 80

Violations of GAAP resulting in qualified opinions affect the standard audit report through which of the following?

A)Modifying the scope paragraph.
B)Adding an explanatory paragraph before the opinion paragraph.
C)Modifying the opinion paragraph to read "except for."
D)Both B and C.
E)All of the above.