Question 1

The auditor has set materiality at XYZ Company of $50 000 based upon a percentage of net assets.The company currently has a small profit (only $3500).Which of the following items would the auditor most likely consider to be material and request an account balance adjustment?

Accepted Answer

An understatement of depreciation expense that would increase depreciation by $5000 is material because it directly affects the profit, which is currently small at $3500. This adjustment would significantly impact the reported profit, making it material despite being below the set materiality threshold based on net assets.

Question 2

In the auditor's responsibility paragraph of the audit report,the use of the term "reasonable assurance" is intended to indicate that

Accepted Answer

The term "reasonable assurance" indicates that while the auditor has performed procedures to reduce the risk of material misstatement in the financial statements, there is still some possibility that material misstatements could exist. This reflects the inherent limitations of an audit.

Question 3

It is the responsibility of an auditor to include this in an audit report:

Accepted Answer

An auditor's responsibility is to provide an opinion in the audit report, which is based on the evidence gathered during the audit process. The opinion reflects the auditor's judgment on the financial statements' fairness and compliance with generally accepted accounting principles. While an auditor may provide recommendations or instructions to management during the audit process, these would not be included in the audit report as they are not part of the auditor's official opinion.

Question 4

One of the most controversial parts of the auditor's report is the meaning of the term "fairly stated." What does the auditor's opinion mean when these words are used?

Accepted Answer

The term "fairly stated" means that the financial statements are presented in accordance with the applicable financial reporting framework, not that they are perfectly accurate or represent liquidation values.

Question 5

It is management's responsibility to select the accounting policies that are used in the preparation of the financial statements.What is the auditor's responsibility with respect to these accounting policies?

Accepted Answer

The auditor's responsibility is to evaluate the appropriateness of the accounting policies that are used and of the associated estimates made to ensure that they are in accordance with accounting standards and reflect the economic substance of transactions. The auditor does not have the responsibility to tell management which accounting policies to select or to recalculate estimates made by management. The approval of accounting policies is also not the responsibility of the auditor, as they must remain independent and unbiased in their evaluation of the financial statements.

Question 6

Under Canadian Auditing Standards,the introductory paragraph of the independent auditor's report for a corporation indicates that the auditor has audited the statement of financial position,the income statement,the statement of cash flows,a summary of accounting policies and notes,and

Accepted Answer

The introductory paragraph of the independent auditor's report for a corporation indicates that the auditor has audited the statement of financial position, the income statement, the statement of cash flows, a summary of accounting policies and notes, and the statement of changes in equity. The statements of retained earnings are now typically included within the statement of changes in equity. Management's discussion and analysis letter and the internal controls of the company are not audited under Canadian Auditing Standards.

Question 7

What is an unmodified audit opinion,sometimes also called an unqualified audit opinion?

Accepted Answer

The answer of What is an unmodified audit opinion,sometimes also...

Question 8

PA firm has been auditing Big Manufacturing Company (BMC)for several years.Last year,BMC converted its inventory and purchasing systems to a new system effective December 31,the date of the year-end.To their horror,the PA firm discovered at the beginning of the current year that there was a cut-off error in the accounts payable system of $25 million dollars last year.Neither the client nor the firm had detected that the purchases of December 31 had been omitted from the old computer system transaction processing and had been recorded only in the new computer system,understating last year's expenses.Last year's financial statements have been restated and the error disclosed in the notes to both last year's and this year's financial statements.What type of audit opinion will BMC receive this year?

Accepted Answer

Given that the error from the previous year has been corrected and disclosed in the financial statements for both years, BMC can receive an unmodified opinion. This indicates that the financial statements present fairly, in all material respects, the financial position of the company.

Question 9

The standard unmodified audit report in the auditor responsibility section states that the audit is designed to

Accepted Answer

The standard unmodified audit report in the auditor responsibility section states that the audit is designed to obtain reasonable assurance that the financial statements are free of material misstatement. Therefore, option C is the best choice. Options A and B are incorrect because even after conducting a thorough audit, it is not always possible for auditors to discover all errors and irregularities, but the focus is on identifying those that are material. Option D is incorrect because the auditor's responsibility is to ensure that the financial statements conform to a recognized financial reporting framework, not the auditor's audit report.

Question 10

There are five conditions that must be met before an auditor can issue an unmodified report.Discuss each of these five conditions.

Accepted Answer

The answer of There are five conditions that must be...

Question 11

The phrase "in our opinion" indicates that

Accepted Answer

The phrase "in our opinion" indicates that the auditor is providing their professional judgment based on the information available to them, but there may still be some level of information risk associated with the financial statements. This means that the auditor's judgment cannot be relied upon without some caution or consideration of potential limitations.

Question 12

Management has several responsibilities that are important to the auditor.One of these is that management is responsible for

Accepted Answer

Management is responsible for internal controls that prevent material misstatements due to fraud or error.

Question 13

What does a "clean" audit opinion mean?

Accepted Answer

A "clean" audit opinion is also known as an unmodified opinion. This means that the financial statements are free from material misstatements and therefore present fairly in accordance with the applicable financial reporting framework. This is the best possible outcome for an audit opinion.

Question 14

The use of the term "reasonable assurance" is intended to indicate that an audit cannot be expected to

Accepted Answer

The term "reasonable assurance" acknowledges that there is some risk of material misstatement or fraud despite the auditor's efforts. It is impossible for an audit to completely eliminate this risk, so the auditor can only provide a reasonable level of assurance that the financial statements are free of material misstatement or fraud.

Question 15

Bianca Jones was engaged to conduct the audit of Smilicor Company (a toy distributor)three months after its year-end date.Bianca was unable to conduct an audit of opening inventory but was able to obtain evidence to satisfy herself with respect to the opening balances.She was also able to conduct audit procedures for other opening balances;for example,by observing fixed assets.What type of audit opinion would Smilicor receive?

Accepted Answer

Since Bianca was able to obtain sufficient evidence with respect to the opening balances, it implies that the financial statements are free from material misstatements. Therefore, Smilicor would receive an unmodified audit opinion.

Question 16

Three of the following conditions would,by themselves,require the auditor to issue a report other than an unmodified report.Which condition would permit an unmodified report?

Accepted Answer

A significant net loss for several years does not necessarily indicate a problem with the financial statements' accuracy or the need for a modified audit report. It reflects the company's financial performance, not the quality of the financial reporting.

Question 17

According to CAS 700,the unmodified audit report's title should be

Accepted Answer

According to CAS 700, the title of the unmodified audit report should be "Independent Auditors' Report." Therefore, option D is the correct choice. Option A is incorrect because it does not have the word "independent." Option B is incorrect because it is too general and does not specifically indicate that it is an audit report. Option C is also incorrect as it does not include the word "independent" and does not specifically mention that it is an audit report.

Question 18

The most common type of audit report contains

Accepted Answer

An unmodified opinion is also known as a clean opinion, and it is the most common type of opinion issued by auditors. This means the financial statements are fairly presented in all material respects in accordance with the generally accepted accounting principles (GAAP). Adverse opinions and disclaimer of opinions are issued when there are significant issues with the financial statements or the auditors are unable to provide an opinion. Modified opinions indicate that the financial statements are materially misstated but not to the extent that they are misleading as a whole.

Question 19

The independent auditor's opinion explains how much evidence the auditor collects during the independent audit.How much evidence is collected?

Accepted Answer

The independent auditor's opinion states that the auditor collected sufficient and appropriate evidence to provide a basis for the audit opinion. This means that the auditor collected enough evidence, and that evidence is relevant and reliable, to support their opinion on whether the financial statements present a true and fair view of the economic events of the organization.

Question 20

CAS 700 is the overarching standard for auditing reporting.Outline the relevant standards that come under it.

Accepted Answer

The answer of CAS 700 is the overarching standard for...

Quiz 19: Audit Reports on Financial Statements

The auditor has set materiality at XYZ Company of $50 000 based upon a percentage of net assets.The company currently has a small profit (only $3500) .Which of the following items would the auditor most likely consider to be material and request an account balance adjustment?