Question 1

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 limitations.

Accepted Answer

A report that acknowledges reliance on the reports of component auditors is a division of responsibility. This type of modification is made when the auditor divides responsibility for the financial statements with another auditor or audit firm. The auditor's report states that they have relied on the work of another auditor, who has audited a component of the financial statements.

Question 2

"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, 20x1…" 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.

Accepted Answer

This is an illustration of a change in accounting estimate that does not affect the comparability of financial statements between periods. As such, it requires a disclosure of the change in the footnotes, but does not require a modification of the auditor's report. Thus, the correct answer is D, a report with a consistency modification.

Question 3

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.

Accepted Answer

The issuance of a disclaimer of opinion generally indicates that the auditors cannot form an opinion on the fairness of presentation of the financial statements as a whole. This can happen due to various reasons, such as limitations in scope, lack of independence, or significant uncertainties.

Question 4

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 an explanatory paragraph.
D)adverse opinion.

Accepted Answer

When an entity refuses to allow inquiry of outside legal counsel, the auditors are unable to obtain sufficient evidence to support their opinion. Therefore, a disclaimer of opinion is the appropriate type of report in this situation.

Question 5

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.

Accepted Answer

Auditors are required to reference consistency in their report when there are changes in accounting principles, as this can have a significant impact on the financial statements and the users' understanding of the company's financial performance. Consistency is not required to be addressed when there are changes in accounting estimates, the format of the Statement of Cash Flows, or the classification of financial statement amounts.

Question 6

In which of the following circumstances may auditors issue the 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 auditors reference component auditors who examined a subsidiary of group financial statements.
D)The auditors have not been able to audit a substantial portion of the balance sheet because of a circumstance-imposed scope limitation.

Accepted Answer

Changing accounting principles that have an immaterial effect would not affect the standard report given by auditors.

Question 7

When reporting on financial statements that include only summarized totals of account balances, the auditors' conclusion should state whether the information in the summary financial statements
A)is complete with respect to disclosures required by the SEC.
B)is fairly stated, in all material respects, in accordance with generally accepted accounting principles.
C)is consistent, in all material respects, with the prior years' summary financial statements.
D)is fairly stated, in all material respects, in relation to the complete financial statements.

Accepted Answer

When reporting on financial statements that only include summarized totals of account balances, the auditors' conclusion should state whether the information is fairly stated, in all material respects, in relation to the complete financial statements. This is because the summary financial statements do not contain all of the information that would be included in the complete financial statements and therefore must be judged in relation to them. The conclusion does not need to address SEC disclosures or consistency with prior years' summary financial statements.

Question 8

Which of the following statements is not included in the Basis for Opinion section of the standard report?
A)"These financial statements are the responsibility of [the company's] management."
B)"Those standards require that we plan and perform the audit to obtain reasonable assurance…"
C)"…it is not a guarantee that an audit conducted in accordance with GAAS will always detect a material misstatement…"
D)"We believe that our audit provides a reasonable basis for our opinion"

Accepted Answer

The statement about the guarantee of detecting material misstatements is typically included in the Auditor's Responsibility section, not the Basis for Opinion section.

Question 9

Which of the following statements is not included in the Basis for Opinion section of the standard report on the entity's financial statements?
A)"The critical audit matter communicated is a matter arising from the current period audit…"
B)"We are a public accounting firm registered with the Public Company Accounting Oversight Board…"
C)"Our audit included evaluating the accounting principles used and significant estimates made by management..."
D)"We conducted our audit in accordance with the standards of the PCAOB."

Accepted Answer

The statement "The critical audit matter communicated is a matter arising from the current period audit…" is related to the communication of critical audit matters, which is not typically included in the Basis for Opinion section of the standard audit report. The Basis for Opinion section generally includes statements about the audit being conducted in accordance with auditing standards, the auditor's belief that the audit provides a reasonable basis for their opinion, and sometimes the auditor's registration status with oversight boards, but not specific matters arising from the audit.

Question 10

Which of the following scope limitations would ordinarily be of most concern to the auditors?
A)The inability to observe inventories because auditors were appointed following the date of the financial statements.
B)Management's refusal to provide auditors with written representations.
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.

Accepted Answer

Management's refusal to provide auditors with written representations would be of most concern to auditors as it can pose a significant risk of fraud or misstatement in the financial statements. Written representations from management serve as evidence that they have acknowledged their responsibilities and disclosed all relevant information to the auditors. Without written representations, auditors may not be able to obtain sufficient and appropriate audit evidence to support their audit opinion. The other options for scope limitations can be addressed with alternative audit procedures or may not significantly impact the audit opinion.

Question 11

When auditors are engaged to examine an entity's financial statements but decide to issue a disclaimer of opinion because of a scope limitation, the report would not
A)identify management's responsibility for the financial statements.
B)refer to any scope limitation in the Basis for Opinion Section.
C)identify the scope limitation as a critical audit matter.
D)indicate that the auditors were engaged to audit the financial statements in the Disclaimer of Opinion on the Financial Statements section.

Accepted Answer

Critical audit matters are those matters that were communicated with those charged with governance and that relate to accounts or disclosures that are material to the financial statements and involved especially challenging, subjective, or complex auditor judgment. A scope limitation prevents the auditor from obtaining sufficient appropriate audit evidence and does not relate to the complexity or judgment involved in auditing material accounts or disclosures. Therefore, a scope limitation would not be identified as a critical audit matter in the auditor's report.

Question 12

If financial statements contain a material but non-pervasive 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.

Accepted Answer

If there is a departure from generally accepted accounting principles that is material but not pervasive (meaning it does not affect the overall financial statements), the auditors should issue a qualified opinion with a reference to the departure. This means that they agree with most of the financial statements, except for the specific area where there was a departure from GAAP, and they explain this qualification in their audit report.

Question 13

Which of the following situations would not result in auditors adding an explanatory paragraph without modifying the remainder of the 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 entity.
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 entity during the most recent fiscal year.

Accepted Answer

The answer of Which of the following situations would not...

Question 14

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.

Accepted Answer

An adverse opinion is issued when the violation of GAAP is sufficiently material and pervasive that a qualified opinion is not justified. While a scope limitation may also result in a qualified opinion, it would not result in an adverse opinion. Independence issues would also result in a qualified opinion. Finally, substantial doubt about an entity's ability to continue as a going concern would result in a disclaimer of opinion, not an adverse opinion.

Question 15

Harris is auditing the financial statements of Cole Corp., an energy company. The FASB requires that these financial statements must be accompanied by supplementary mineral reserve information. If this required information is materially misstated, what type of report should Harris issue?
A)Unmodified opinion with an other-matter paragraph disclaiming an opinion on the mineral reserve information.
B)Adverse opinion on the financial statements and mineral reserve information due to the misstatement.
C)Unmodified opinion on the financial statements with an other-matter paragraph expressing an adverse opinion on the mineral reserve information.
D)Qualified opinion on the financial statements and mineral reserve information due to the misstatement.

Accepted Answer

The answer of Harris is auditing the financial statements of...

Question 16

When other information is presented in a document with audited financial statements, the auditors' report should
A)state that the auditor read the other information for inconsistencies and misstatements with the financial statements.
B)provide limited assurance as to whether the other information is presented in accordance with generally accepted accounting principles.
C)reference the other information only if inconsistencies or material misstatements are identified between this information and the financial statements.
D)be expanded to express an opinion that the other information is consistent with the financial statements and not materially misstated.

Accepted Answer

The auditors' report should state that they have read the other information for inconsistencies and misstatements with the financial statements as required by auditing standards. This helps provide users of the financial statements with assurance that the other information is not materially misstated or inconsistent with the financial statements. Options B, C, and D are incorrect because they do not accurately reflect the auditor's responsibilities when it comes to other information included in the document.

Question 17

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.

Accepted Answer

When auditors lack independence, they should disclaim an opinion and should specifically state that they are not independent. This is required by the International Standards on Auditing (ISA) and the Generally Accepted Auditing Standards (GAAS). Disclaiming an opinion informs users that the audit could not be conducted in accordance with professional standards and that the financial statements may not be reliable.

Question 18

The auditors' report on the entity's financial statements included language 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 on the Financial Statements section 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.

Accepted Answer

The inclusion of language disclosing a difference of opinion between the auditors and the entity indicates a departure from generally accepted accounting principles, which warrants a qualified opinion.

Question 19

The standard (unmodified) report issued in the audit of a non-issuer includes a(n)
A)Responsibilities of Management for the Financial Statements Section providing a general description of an audit conducted in accordance with the applicable auditing standards.
B)Opinion Section identifying the responsibility of management and auditors in the financial reporting process.
C)Internal Control Section indicating the effectiveness of the entity's internal control over financial reporting.
D)Opinion Section providing the auditors' conclusion as to the fair presentation of the financial statements.

Accepted Answer

The standard (unmodified) report issued in the audit of a non-issuer includes an Opinion Section providing the auditors' conclusion as to the fair presentation of the financial statements. The Responsibilities of Management for the Financial Statements Section provides a description of management's responsibilities, not the audit conducted. The Internal Control Section is only included in the audit report if the auditor decides to report on internal control over financial reporting.

Question 20

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 since 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 an additional section describing the material inconsistency.

Accepted Answer

When auditors identify a material inconsistency in the "other information" of an annual report that does not affect the financial statements themselves, and the entity refuses to revise the inconsistency, the auditors may choose to revise their report to include a description of the material inconsistency. This action ensures that the readers of the financial statements are aware of the inconsistency, without the auditors having to qualify their opinion on the financial statements themselves, as those are not directly impacted by the inconsistency in the other information.

Quiz 12: Reports on Audited Financial Statements

A report that acknowledges reliance on the reports of component auditors is a type of report modification known as a(n)

"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, 20x1…" is an illustration of a

The issuance of a disclaimer of opinion generally indicates

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)

Auditors are required to reference consistency in their report when there are changes in

In which of the following circumstances may auditors issue the standard report on the entity's financial statements?

When reporting on financial statements that include only summarized totals of account balances, the auditors' conclusion should state whether the information in the summary financial statements

Which of the following statements is not included in the Basis for Opinion section of the standard report?

Which of the following statements is not included in the Basis for Opinion section of the standard report on the entity's financial statements?

Which of the following scope limitations would ordinarily be of most concern to the auditors?

When auditors are engaged to examine an entity's financial statements but decide to issue a disclaimer of opinion because of a scope limitation, the report would not

If financial statements contain a material but non-pervasive departure from generally accepted accounting principles, the auditors should render a(n)

Which of the following situations would not result in auditors adding an explanatory paragraph without modifying the remainder of the report?

Auditors will issue an adverse opinion when

Harris is auditing the financial statements of Cole Corp., an energy company. The FASB requires that these financial statements must be accompanied by supplementary mineral reserve information. If this required information is materially misstated, what type of report should Harris issue?

When other information is presented in a document with audited financial statements, the auditors' report should

When auditors lack independence, which of the following is true about the report on the entity's financial statements that should be issued?

The standard (unmodified) report issued in the audit of a non-issuer includes a(n)