Question 1

Morgan,CPA,is the group auditor for a multinational corporation.Another CPA has examined and reported on the financial statements of a significant subsidiary of the corporation.Morgan is satisfied with the independence and professional reputation of the component auditor,as well as the quality of the component auditor's audit.With respect to Morgan's report on the consolidated financial statements,taken as a whole,Morgan:

Accepted Answer

According to the International Standards on Auditing, if the group auditor (in this case, Morgan) is satisfied with the independence and professional reputation of the component auditor, as well as the quality of the component auditor's audit, then the group auditor may refer to the audit of the component auditor in their report on the consolidated financial statements. However, the group auditor must explicitly state in their report that they have relied on the work of the component auditor and that they have not audited the subsidiary's financial statements. There is no requirement for a qualified opinion in this situation. Therefore, the best choice is C.

Question 2

In which of the following circumstances will it be most likely that an adverse opinion is considered appropriate?

Accepted Answer

An adverse opinion is appropriate when the financial statements are not in conformity with generally accepted accounting principles that have a material impact on the financial statements. This circumstance is described in option C, where the statements are not in conformity with GAAP regarding pension plans. Options A and D suggest that the auditor's independence or ability to conduct an audit has been compromised, which would require a disclaimer or qualified opinion, respectively. Option B suggests a departure from GAAP with an immaterial impact, which would result in an unqualified opinion with an explanatory paragraph.

Question 3

An independent auditor has concluded that substantial doubt remains about a nonpublic client's ability to continue as a going concern,but the client's financial statements have properly disclosed all of its solvency problems.The auditor would probably issue a(an):

Accepted Answer

The independent auditor would issue an unmodified opinion with an appropriate emphasis-of-matter paragraph to disclose the substantial doubt about the client's ability to continue as a going concern. This opinion is sometimes referred to as a "going concern opinion." The fact that the financial statements have properly disclosed all of its solvency problems also supports the issuance of an unmodified opinion. A qualified opinion, adverse opinion, or disclaimer of opinion would not be appropriate in this situation.

Question 4

The auditors include an emphasis-of-matter paragraph in a nonpublic company audit report with an unmodified opinion in order to emphasize that the entity being reported upon is a subsidiary of another business enterprise.The inclusion of this paragraph:

Accepted Answer

Including an emphasis-of-matter paragraph in a nonpublic company audit report with an unmodified opinion is appropriate and would not negate the unmodified opinion. The purpose of the emphasis-of-matter paragraph is to draw the reader's attention to a specific matter, such as the fact that the entity being reported upon is a subsidiary of another business enterprise. This information does not impact the audit opinion and therefore, is not considered a qualification of the opinion. Additionally, it is not a violation of generally accepted reporting standards to include this information in an emphasis-of-matter paragraph rather than in the notes to the financial statements. The opinion paragraph does not require revision, as the unmodified opinion still applies.

Question 5

For a continuing audit client,when a complete set of financial statements is presented on a comparative basis for two years,the auditors' opinion would refer to:

Accepted Answer

When a complete set of financial statements is presented on a comparative basis for two years, the auditors' opinion would refer to each of the years in the two-year period. This is because the auditors need to express their opinion on the financial statements for each year separately, as financial information could differ between the two years. Therefore, the auditors' opinion would cover both years included in the comparative financial statements.

Question 6

For a particular entity's financial statements to be presented fairly in conformity with generally accepted accounting principles,it is not required that the principles selected:

Accepted Answer

While it is generally preferred for accounting principles to be applied on a basis consistent with prior years, it is not an absolute requirement for the financial statements to be presented fairly in conformity with generally accepted accounting principles. A change in accounting principle or estimate may be necessary, and as long as it is properly disclosed and justified, it will not impede the fair presentation of the financial statements. Choices A, B, and C are all necessary criteria for financial statements to be presented fairly in conformity with generally accepted accounting principles.

Question 7

Which of the following will result in emphasis-of-matter as to consistency in a nonpublic company auditor's report,regardless of whether the item is fully disclosed in the financial statements?

Accepted Answer

A change from an unacceptable accounting principle to a generally accepted one will result in emphasis-of-matter as to consistency in a nonpublic company auditor's report, regardless of whether the item is fully disclosed in the financial statements.

Question 8

If an accounting change has no material effect on the financial statements in the current year,but the change is reasonably certain to have a material effect in later years,the change should be:

Accepted Answer

Accounting changes that have no material effect in the current year but are expected to have a material effect in later years are considered to be a future event. Such events are required to be disclosed in the footnotes to the financial statements of the current year. However, they do not require disclosure in the auditor's report or treatment as a subsequent event.

Question 9

When financial statements of a prior period are presented on a comparative basis with financial statements of the current period,the continuing auditor is responsible for:

Accepted Answer

When financial statements of a prior period are presented on a comparative basis with financial statements of the current period, the continuing auditor is responsible for updating the report on the previous financial statements regardless of the opinion previously issued. This ensures that the auditor's opinion reflects any new information or changes that may have occurred since the original report was issued.

Question 10

Under which of the following set of circumstances might the auditors disclaim an opinion?

Accepted Answer

If the auditors cannot observe ending inventory nor confirm accounts receivable and cannot obtain sufficient evidence using alternative procedures, they may disclaim an opinion on the financial statements. This is because the lack of sufficient evidence means that the auditors cannot provide assurance as to the accuracy and completeness of the financial statements. A disclaimer of opinion is issued when the auditor is unable to express an opinion on the financial statements due to limitations on the scope of the audit or lack of sufficient evidence. Option A would result in an adverse opinion, B would result in an unmodified opinion with an emphasis of matter paragraph, and C would result in a qualified or adverse opinion.

Question 11

Which of the following is not included in PCAOB Form AP?

Accepted Answer

PCAOB Form AP requires disclosure of the engagement partner for audits (A), the name of each accounting firm whose work constituted at least 5% of total audit hours (B), and the aggregate participation of accounting firms whose individual work was less than 5% of total audit hours (C). However, it does not require disclosure of audit staff investments in each particular client (D).

Question 12

Ray,an independent auditor,was engaged to perform an audit of the financial statements of Zena Incorporated one month after its fiscal year had ended.Although the inventory count was not observed by Ray,the auditors were able to obtain sufficient appropriate audit evidence by applying alternative auditing procedures.Rays audit report will probably contain:

Accepted Answer

Although Ray did not observe the inventory count, the auditors were still able to obtain sufficient appropriate audit evidence by applying alternative auditing procedures. Therefore, there is no reason to qualify or disclaim the opinion, nor is there a need for an emphasis-of-matter paragraph or "except for" qualification. Instead, a standard unmodified opinion is likely to be issued.

Question 13

Which of the following is least likely to result in a qualification of the auditors' opinion due to a scope limitation?

Accepted Answer

Reliance on the report of component auditors is a common practice in auditing, especially for large corporations with multiple divisions or international operations. This does not inherently limit the scope of the audit or lead to a qualification of the auditors' opinion, as long as the principal auditors are satisfied with the work of the component auditors.

Question 14

An auditor's report on comparative financial statements should be dated as of the date of the:

Accepted Answer

The auditor's report should be dated as of the date when the auditor has accumulated sufficient appropriate audit evidence to support the opinion on the financial statements. This date signifies the end of the auditor's responsibility for the review of events that may affect the financial statements.

Question 15

Which of the following is a general purpose financial reporting framework?

Accepted Answer

International Financial Reporting Standards (IFRS) is a global standard for financial reporting, used by companies in over 100 countries. It sets out the principles and framework for financial reporting, including presentation and disclosure requirements. While the other options (A, B, and C) are related to auditing standards, IFRS is a financial reporting framework.

Question 16

A basis for modification paragraph for a nonpublic company is least likely to relate to which of the following types of opinion?

Accepted Answer

A basis for modification paragraph is typically added to an audit report when the auditor has modified their opinion. An unmodified opinion means that no modifications or qualifications have been made to the financial statements. Therefore, a basis for modification paragraph is least likely to relate to an unmodified opinion (choice A). It is more likely to relate to a qualified, adverse, or disclaimer opinion.

Question 17

When reporting on comparative financial statements where the financial statements of the prior period have been examined by a predecessor auditor whose report is not presented,the successor auditor should indicate in the report:

Accepted Answer

The successor auditor should indicate the type of opinion expressed by the predecessor auditor when the predecessor's report is not presented. This provides context and continuity for the financial statement users regarding the audit opinions over time.

Question 18

When the auditor is unable to determine the amounts associated with noncompliance with a law by client personnel due to a scope limitation,the auditor should issue a(an):

Accepted Answer

When the auditor is unable to obtain sufficient appropriate evidence due to a scope limitation, a disclaimer of opinion should be issued. Noncompliance with laws and regulations is an important matter and if the auditor is unable to determine the amounts associated with noncompliance by client personnel, it represents a material scope limitation that prevents the auditor from forming an opinion on the financial statements as a whole. In this case, a disclaimer of opinion is the appropriate choice.

Question 19

Which of the following representations does an auditor make explicitly and which implicitly when issuing a standard unqualified opinion on a public company's financial statements? $\begin{array}{ll}\text { Conformity with PCAOB Standards}&\text{
Going Concern Status}\end{array}$
A-$\begin{array}{ll}\quad\quad\quad\quad\quad\text { Explicitly } &\quad\quad\quad\quad\quad\quad\quad \text { Explicitly } \\end{array}$
B-$\begin{array}{ll}\quad\quad\quad\quad\quad\text { Implicitly } &\quad\quad\quad\quad\quad\quad\quad \text { Implicitly } \\end{array}$
C-$\begin{array}{ll}\quad\quad\quad\quad\quad\text { Implicitly } &\quad\quad\quad\quad\quad\quad\quad \text { Explicitly } \\end{array}$
D-$\begin{array}{ll}\quad\quad\quad\quad\quad\text { Explicitly } &\quad\quad\quad\quad\quad\quad\quad \text { Implicitly }
\end{array}$

Accepted Answer

An auditor explicitly states conformity with PCAOB standards in the audit report, while the going concern status is typically only addressed explicitly if there is substantial doubt.

Question 20

An auditor has been asked to report on the balance sheet of Kane Company but not on the other basic financial statements.The auditor will have access to all information underlying the basic financial statements.Under these circumstances,the auditor:

Accepted Answer

Auditors can accept engagements to report on a single financial statement, such as the balance sheet, as long as they have access to all necessary information. This does not constitute a scope limitation or a departure from generally accepted auditing standards, allowing the auditor to perform the engagement and provide an appropriate opinion.

Quiz 17: Auditors Reports