Deck 3: Audit Reports

Question 1

The auditor's responsibility section of the standard unmodified opinion audit report states that the auditor is

A)responsible for the financial statements and the opinion on them.
B)responsible for the financial statements.
C)responsible for the opinion on the financial statements.
D)jointly responsible for the financial statements with management.

Answer 1

C

Question 2

Which of the following statements are True for the standard unmodified opinion audit report of a nonpublic entity?
I) The introductory paragraph states that management is responsible for the preparation and content of the financial statements.
II) The scope paragraph states that the auditor evaluates the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management.

A)I only
B)II only
C)I and II
D)Neither I nor II

Answer 2

B

Question 3

To emphasize the fact that the auditor is independent,a typical addressee of the audit report could be

A)
B)
C)
D)

Answer 3

A

Question 4

If the balance sheet of a private company is dated December 31,2016,the audit report is dated February 8,2017,and both are released on February 15,2017,this indicates that the auditor has searched for subsequent events that occurred up to

A)December 31,2016.
B)January 1,2017.
C)February 8,2017.
D)February 15,2017.

Question 5

An audit report prepared by Garrett and Brown,CPAs,is provided below.The audit for the year ended December 31,2016 was completed on March 1,2017,and the report was issued to Javlin Corporation,a private company,on March 13,2017.List any deficiencies in this report.Do not rewrite the report.
We have examined the accompanying financial statements of Dalton Corporation as of December 31,2016.These financial statements are the responsibility of the company's management.
Management's Responsibility for the Financial Statements:
Management is responsible for the preparation and fair presentation of the financial statements in accordance with generally accepted auditing standards;this includes the design,implementation,and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from all misstatement,whether due to fraud or error.
Auditor's Responsibility
Our responsibility is to give an opinion on these financial statements based on our audit.We conducted our audit in accordance with auditing standards generally accepted throughout the world.Those standards require that we plan and perform the audit to obtain absolute assurance about whether the financial statements are free of misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements.The procedures selected depend on management's judgment,including the assessment of the risks of material misstatement of the income statement,whether due to fraud or error.In making those risk assessments,the auditor considers internal control relevant to the auditor's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances,but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control.An audit also includes evaluating the appropriateness of accounting policies and the accuracy of accounting estimates made by management,as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion,the financial statements referred to above present accurately the financial position of Javlin Corporation as of December 31,2016,in conformity with accounting principles generally accepted in the United States of America.
Garrett and Brown,CPAs
March,2017

Question 6

The introductory paragraph of the standard unmodified opinion audit report for a nonpublic company performs which functions?
I) It states the CPA has performed an audit.
II) It lists the financial statements being audited.
III) It states the financial statements are the responsibility of the auditor.

A)I and II
B)I and III
C)II and III
D)I,II and III

Question 7

Which of the following is not explicitly stated in the standard unmodified opinion audit report?

A)The financial statements are the responsibility of management.
B)The audit was conducted in accordance with generally accepted accounting principles.
C)The auditors believe that the audit evidence provides a reasonable basis for their opinion.
D)An audit includes assessing the accounting estimates used.

Question 8

EPM,Inc.,is a private manufacturing company with a calendar year-end.Their financial statements include a balance sheet,a statement of income,statement of cash flows,and statement of stockholders' equity.For the most recent audit,Harrington and Perry,LLP,audited the 2015 and 2016 financial statements.The auditors completed all significant fieldwork on March 5,2017 and issued the audit report on March 16,2017.
Required:
Consider all the facts given and write the standard unmodified opinion audit report,including all eight sections of the report.

Question 9

Most auditors believe that financial statements are "presented fairly" when the statements are in accordance with GAAP,and that it is also necessary to

A)determine that they are not in violation of FASB statements.
B)examine the substance of transactions and balances for possible misinformation.
C)review the statements using the accounting principles promulgated by the SEC.
D)assure investors that net income reported this year will be exceeded in the future.

Question 10

An audit provides a guarantee that a material misstatement will not exist in the financial statements.

Question 11

Auditing standards require that the audit report must be titled and that the title must

A)include the word "independent."
B)indicate if the auditor is a CPA.
C)indicate if the auditor is a proprietorship,partnership,or corporation.
D)indicate the type of audit opinion issued.

Question 12

The appropriate audit report date for a standard unmodified opinion audit report for a nonpublic entity should be

A)the date the financial statements are given to the Board of Directors.
B)the date of the financial statements.
C)the date the auditor completed the auditing procedures in the field.
D)60 days after the date of the financial statements as required by the SEC.

Question 13

The management's responsibility section of the standard unmodified opinion audit report for a nonpublic company states that the financial statements are

A)the responsibility of the auditor.
B)the responsibility of management.
C)the joint responsibility of management and the auditor.
D)none of the above.

Question 14

Which of the following is a correct statement regarding the standard unmodified opinion audit report?

A)The format of the audit report for public and nonpublic entities are identical.
B)The auditor's responsibility paragraph includes a statement that the auditors are responsible for selecting the appropriate accounting principles.
C)The audit report includes the name of the lead partner on the audit.
D)The scope paragraph includes a statement that the auditor considers internal controls when designing the audit procedures performed.

Question 15

The audit report date on a standard unmodified opinion audit report indicates

A)the last day of the fiscal period.
B)the date on which the financial statements were filed with the Securities and Exchange Commission.
C)the last date on which users may institute a lawsuit against either the client or the auditor.
D)the last day of the auditor's responsibility for the review of significant events that occurred after the date of the financial statements.

Question 16

The standard audit report for nonpublic entities refers to GAAS and GAAP in which sections?

A)
B)
C)
D)

Question 17

The auditor's responsibility section of the standard unmodified opinion audit report states that the audit is designed to

A)discover all errors and/or irregularities.
B)discover material errors and/or irregularities.
C)conform to generally accepted accounting principles.
D)obtain reasonable assurance whether the statements are free of material misstatement.

Question 18

Describe the standard unmodified opinion audit report to be issued for an audit of a private company.Begin by specifying the eight parts of the report,and then discuss the contents of each part.

Question 19

The standard unmodified opinion audit report for a nonpublic entity must

A)have a report title that includes the word "CPA."
B)be addressed to the company's stockholders and creditors.
C)be dated.
D)include an explanatory paragraph.

Question 20

AICPA auditing standards provide uniform wording for the auditor's report to enable users of the financial statements to understand the audit report.

Question 21

The unqualified opinion audit report for public entities includes the following three paragraphs:

A)introductory,scope and management's responsibility.
B)materiality,scope and report.
C)introductory,scope and opinion.
D)scope,fieldwork and conclusion.

Question 22

Financial statement users are normally much more concerned about a disclaimer than an unmodified opinion audit report that contains an additional-emphasis-of-matter paragraph.

Question 23

The phrase "accounting principles generally accepted in the United States of America" can be found in the opinion paragraph of a standard unmodified opinion report.

Question 24

The scope paragraph of the auditor's responsibility section of the audit report issued for financial statements of a nonpublic company should refer to auditing standards generally accepted in the United States of America.

Question 25

When analyzing the various types of audit reports,

A)the unmodified opinion with an emphasis-of-matter paragraph is the most common type of report.
B)companies will generally make the appropriate changes to their accounting records to avoid a qualification by the auditor.
C)management is more concerned about a qualified report than a disclaimer report.
D)an adverse report is issued when the auditor is unable to form an opinion on the financial statements.

Question 26

The phrase "auditing standards generally accepted in the United States of America" can be found in the opinion paragraph of a standard unmodified opinion report for a nonpublic company.

Question 27

Users of the financial statements rely on the auditor's report because of the absolute assurance the report provides.

Question 28

There are four conditions that must be met before an auditor can issue a standard unmodified opinion audit report for the audit of a private company.Please discuss each of these five conditions.

Question 29

The introductory paragraph of the auditor's report states that the auditor is responsible for the preparation,presentation and opinion on financial statements.

Question 30

Whenever an auditor issues an audit report for a public company,the auditor can choose to issue a report in which of the following forms?
I) A combined report on financial statements and internal control over financial reporting
II) Separate reports on financial statements and internal control over financial reporting

A)I only
B)II only
C)either I or II
D)neither I nor II

Question 31

The audit report is normally addressed to the company's president or chief executive officer.

Question 32

The standard unmodified audit report

A)is sometimes called a clean opinion.
B)can be issued only with an explanatory paragraph.
C)can be issued if only a balance sheet and income statement are included in the financial statements.
D)is sometimes called a disclaimer report.

Question 33

The audit report date is the date the auditor completed audit procedures in the field.

Question 34

An auditor will issue a disclaimer when he concludes that the financial statements are not fairly presented.

Question 35

The phrase "Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material error" is included in the auditor's opinion section of an audit report.

Question 36

The date of the auditor's report is indicative of the last day of the auditor's responsibility for the review of significant events occurring after the balance sheet date.

Question 37

What category of audit report will be issued if the auditor concludes that the financial statements are not fairly presented?

A)disclaimer
B)qualified
C)standard unmodified opinion
D)adverse

Question 38

An audit of historical financial statements most commonly includes the

A)balance sheet,statement of retained earnings,and the statement of cash flows.
B)income statement,the statement of cash flows,and the statement of net working capital.
C)statement of cash flows,balance sheet,and the statement of retained earnings.
D)balance sheet,income statement,statement of cash flows,and the statement of changes in stockholders' equity.

Question 39

Auditing standards for public companies are established by the

A)SEC.
B)FASB.
C)PCAOB.
D)IRS.

Question 40

In the scope paragraph of the audit report issued for financial statements of a nonpublic company,the auditor expresses an opinion about the internal controls of the company.

Question 41

When the auditor concludes that there is substantial doubt about the entity's ability to continue as a going concern,the appropriate audit report could be I. an unmodified opinion audit report with an explanatory paragraph.
II) a disclaimer of opinion.

A)I only
B)II only
C)I or II
D)Neither I nor II

Question 42

A CPA may wish to emphasize specific matters regarding the financial statements even though an unqualified opinion will be issued.Normally,such explanatory information is

A)included in the scope paragraph.
B)included in the opinion paragraph.
C)included in a separate paragraph in the report.
D)included in the introductory paragraph.

Question 43

The term "explanatory paragraph" was replaced in the AICPA auditing standards with

A)going concern paragraph.
B)emphasis-of-matter paragraph.
C)departure from principles paragraph.
D)consistency paragraph.

Question 44

All of the following would require an emphasis of matter paragraph except for

A)the existence of material related party transactions.
B)the lack of auditor independence.
C)important events occurring subsequent to the balance sheet date.
D)material uncertainties disclosed in the footnotes.

Question 45

Under PCAOB standards

A)the standard unmodified opinion audit report is referred to as an unqualified opinion audit report.
B)the scope paragraph states that the financial statements are the responsibility of management.
C)internal controls of a public company must be audited every five years.
D)the scope paragraph is the same as the scope paragraph for private companies.

Question 46

No reference is made in the auditor's report to other auditors who perform a portion of the audit when I. The other auditor audited an immaterial portion of the audit.
II) The other auditor is well known or closely supervised by the principle auditor.
III) The principle auditor has thoroughly reviewed the work of the other auditor.

A)I and II
B)I and III
C)II and III
D)I,II and III

Question 47

Examples of unmodified opinions which contain modified wording (without adding an explanatory paragraph)include

A)the use of other auditors.
B)the lack of consistent application of generally accepted accounting principles.
C)substantial doubt about the audited company (or the entity)continuing as a going concern.
D)lack of consistent application of GAAP.

Question 48

When an auditor is trying to determine how changes can affect consistency and and/or comparability,he should keep in mind that

A)changes that affect comparability but not consistency require an explanatory paragraph.
B)items that materially affect the comparability of financial statements requires a disclaimer of opinion.
C)changes that affect consistency require an explanatory paragraph if they are material.
D)changes that involve either comparability or consistency only need to be mentioned in the footnotes.

Question 49

When there is uncertainty about a company's ability to continue as a going concern,the auditor's concern is the possibility that the client may not be able to continue its operations or meet its obligations for a "reasonable period of time." For this purpose,a reasonable period of time is considered not to exceed

A)six months from the date of the financial statements.
B)one year from the date of the financial statements.
C)six months from the date of the audit report.
D)one year from the date of the audit report.

Question 50

Section 404(b)of the Sarbanes Oxley Act requires that the auditor of a public company attest to management's report on the efficiency of internal controls over financial reporting.

Question 51

Which of the following is least likely to cause uncertainty about the ability of an entity to continue as a going concern?

A)The entity is suing a competitor for a minor patent infringement.
B)The entity has lost a major customer.
C)The entity has significant recurring operating losses.
D)The entity has working capital deficiencies.

Question 52

A company has changed its method of inventory valuation from an unacceptable one to one in conformity with generally accepted accounting principles.The auditor's report on the financial statements of the year of the change should include

A)no reference to consistency.
B)a reference to a prior period adjustment in the opinion paragraph.
C)an explanatory paragraph that justifies the change and explains the impact of the change on reported net income.
D)an explanatory paragraph explaining the change.

Question 53

PCAOB standards use the term "unqualified opinion" to refer to the standard unmodified opinion audit report.

Question 54

Which of the following are changes that affect the comparability of financial statements but not the consistency and therefore,do not have to be included in the auditor's report?

A)error corrections not involving principles
B)changes in accounting estimates
C)variations in the format and presentation of financial information
D)all of the above

Question 55

When a company's financial statements contain a departure from GAAP with which the auditor concurs,the departure should be explained in

A)the scope paragraph.
B)an introductory paragraph.
C)the opinion paragraph.
D)a separate paragraph.

Question 56

William Gregory,CPA,is the principal auditor for an international corporation.Another CPA has examined and reported on the financial statements of a significant subsidiary of the corporation.Gregory is satisfied with the independence and professional reputation of the other auditor,as well as the quality of the other auditor's examination.With respect to his report on the consolidated financial statements,taken as a whole,Gregory

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)must refer to the examination of the other auditors along with the percentage of consolidated assets and revenue that they audited.

Question 57

Which of the following modifications of the auditor's report does not include an explanatory paragraph?

A)A qualified report is due to a GAAP departure.
B)The report includes an emphasis of a matter.
C)There is a very material scope limitation.
D)A principal auditor accepts the work of an other auditor.

Question 58

Auditors of public company financial statements must issue separate reports on internal control over financial reporting.

Question 59

The separate report on internal control over financial reporting

A)cannot contain a cross-reference to the auditor's report on the financial statements.
B)includes a paragraph that addresses the inherent limitations of internal controls.
C)is addressed to the PCAOB.
D)includes a scope paragraph which refers to the framework used to evaluate internal controls.

Question 60

All of the following are causes for the addition of an explanatory paragraph under both AICPA and PCAOB standards except for

A)emphasis of a matter.
B)reports involving other auditors.
C)lack of consistent application of generally accepted accounting principles.
D)auditor agrees with a departure from promulgated accounting principles.

Question 61

The only unmodified opinion audit report that does not include an explanatory paragraph is when other auditors are involved.In this case only the introductory paragraph is modified.

Question 62

When there is a lack of consistent application in accounting principles

A)the nature and impact of the change should be adequately disclosed.
B)the auditor should discuss the nature of the change and point the reader to the footnote that discusses the change.
C)the materiality of the change is evaluated based on the current year effect of the change.
D)all of the above.

Question 63

Changes in accounting estimates requires the auditor to issue a modified audit report with a consistency paragraph inserted after the opinion paragraph.

Question 64

As a result of management's refusal to permit the auditor to physically examine inventory,the auditor must depart from the unmodified opinion audit report because

A)the financial statements have not been prepared in accordance with GAAP.
B)the scope of the audit has been restricted by circumstances beyond either the client's or auditor's control.
C)the financial statements have not been audited in accordance with GAAS.
D)the scope of the audit has been restricted.

Question 65

When an auditor relies upon a different CPA firm to perform part of the audit and chooses to issue a shared opinion,only the auditor's responsibility paragraph should be modified.

Question 66

When other auditors are involved in the audit and they qualify their portion of the audit,the principal auditor must decide if the amount in question is material to the financial statements as a whole.

Question 67

Indicate which changes would require an explanatory paragraph in the audit report.

A)
B)
C)
D)

Question 68

Which of the following is false concerning the principal CPA firm's alternatives when issuing a report when another CPA firm performs part of the audit?

A)Issue a joint report signed by both CPA firms.
B)Make no reference to the other CPA firm in the audit report,and issue the standard unqualified opinion.
C)Make reference to the other auditor in the report by using modified wording (a shared opinion or report).
D)A qualified opinion or disclaimer,depending on materiality,is required if the principal auditor is not willing to assume any responsibility for the work of the other auditor.

Question 69

Which of the following requires recognition in the auditor's opinion as to consistency?

A)The correction of an error in the prior year's financial statements resulting from a mathematical mistake in capitalizing interest.
B)A change in the estimate of provisions for warranty costs.
C)The change from the cost method to the equity method of accounting for investments in common stock.
D)A change in depreciation method which has no effect on current year's financial statements but is certain to affect future years.

Question 70

Indicate which changes would require an explanatory paragraph in the audit report.

A)
B)
C)
D)

Question 71

Discuss each of the five circumstances when an auditor would issue an unmodified opinion audit report with an emphasis-of-matter paragraph or nonstandard report wording.

Question 72

Changes in an estimate,such as a change in the estimated useful life of an asset for depreciation purposes,affect consistency but not comparability,and therefore require an explanatory paragraph in the audit report.

Question 73

Changes in reporting entities,such as the inclusion of an additional company in combined financial statements,affect comparability but not consistency,and therefore do not require an explanatory paragraph in the audit report.

Question 74

Indicate which changes would require an explanatory paragraph in the audit report.

A)
B)
C)
D)

Question 75

An unmodified opinion audit report with an emphasis-of-matter paragraph is issued when the auditor believes the financials are fairly stated but also believes additional information should be provided.

Question 76

The unmodified opinion audit report with emphasis-of-matter paragraph does not meet the criteria of a complete audit with satisfactory results.

Question 77

When there is a lack of consistent application of GAAP due to a new accounting pronouncement,no explanatory paragraph is required.

Question 78

Indicate which changes would require an explanatory paragraph in the audit report.

A)
B)
C)
D)

Question 79

Under AICPA auditing standards,the primary auditor issuing the opinion on the financial statements is called the

A)component auditor.
B)principal auditor.
C)group engagement partner.
D)majority auditor.

Question 80

Items that materially affect the comparability of the financial statements generally require disclosure in the footnotes.