Question 1

If most or all users' decisions that are based on the financial statements are likely to be significantly affected, the materiality level is:
A)unrestricted.
B)material.
C)pervasive.
D)risky.

Accepted Answer

Pervasive materiality means that there is a high likelihood that users' decisions based on the financial statements will be significantly affected. Therefore, if most or all users' decisions are likely to be significantly affected, the materiality level is considered pervasive.

Question 2

Which of the following scenarios does not result in a qualified opinion?
A)A scope limitation prevents the auditor from completing an important audit procedure.
B)Circumstances exist that prevent the auditor from conducting a complete audit.
C)The auditor lacks independence with respect to the audited entity.
D)An accounting principle at variance with GAAP is used.

Accepted Answer

Lack of independence with respect to the audited entity results in a disclaimer of opinion, not a qualified opinion. A qualified opinion is issued when the auditor is able to obtain sufficient evidence but an exception exists, such as a departure from GAAP or a scope limitation that affects a specific account or disclosure.

Question 3

A qualified report can take the form of a qualification of both the scope and the opinion or of the opinion alone.

Accepted Answer

A qualified report can be qualified in both the scope and opinion, or only in the opinion. It depends on the specific circumstances and reasons for the qualification.

Question 4

The dollar amount of some misstatements cannot be accurately measured.For example, if the client were unwilling to disclose an existing lawsuit, the auditor must estimate the likely effect on:
A)net income.
B)users of the financial statements.
C)the auditor's exposure to lawsuits.
D)management's future decisions.

Accepted Answer

The misstatement of an existing lawsuit can have an impact on the users of financial statements, such as investors, creditors, and analysts who rely on the information to make decisions. Therefore, the estimation of the likely effect on users of financial statements is more appropriate than the effect on net income, the auditor's exposure to lawsuits, or management's future decisions.

Question 5

Auditors should issue a disclaimer of opinion when there is a highly material client-imposed scope restriction.

Accepted Answer

If the scope restriction is highly material and the auditor is unable to obtain sufficient appropriate audit evidence, the auditor should issue a disclaimer of opinion. This is because the auditor is unable to provide an opinion on the financial statements as a whole.

Question 6

Whenever the client imposes restrictions on the scope of the audit, the auditor should be concerned that management may be trying to prevent discovery of misstatements.In such cases, the auditor will likely issue a:
A)disclaimer of opinion in all cases.
B)qualification of both scope and opinion in all cases.
C)disclaimer of opinion whenever materiality is in question.
D)qualification of both scope and opinion whenever materiality is in question.

Accepted Answer

When a client imposes restrictions on the scope of the audit, it raises concerns about the potential for undiscovered misstatements. If these restrictions affect the auditor's ability to obtain sufficient appropriate audit evidence, especially regarding material aspects of the financial statements, the auditor may issue a disclaimer of opinion. This is because the auditor cannot conclude on the overall fairness of the financial statements due to the scope limitation.

Question 7

A misstatement in the financial statements can be considered material if knowledge of the misstatement will affect a decision of:
A)the PCAOB.
B)a reasonable user of the financial statements.
C)an accountant.
D)the SEC.

Accepted Answer

A misstatement in the financial statements is considered material if it has the potential to affect the decisions of a reasonable user of the financial statements, such as investors or creditors. The PCAOB and the SEC may also be interested in the misstatement, but the materiality of it is ultimately determined by its impact on the users of the financial statements. An accountant's knowledge of the misstatement may also be important in correcting the error, but it does not determine materiality.

Question 8

Which of the following statements is true?
I.The auditor is required to issue a disclaimer of opinion in the event of a material uncertainty.
II.The auditor is required to issue a disclaimer of opinion in the event of a going concern problem.
A)I only
B)II only
C)I and II
D)Neither I nor II

Accepted Answer

A material uncertainty related to going concern does not automatically lead to a disclaimer of opinion. The auditor may express an unmodified opinion with an emphasis of matter paragraph regarding the going concern uncertainty. Similarly, a going concern problem does not always result in a disclaimer of opinion; the response depends on the specific circumstances and the adequacy of disclosure in the financial statements.

Question 9

The most common case in which conditions beyond the client's and auditor's control cause a scope restriction in an engagement is when the:
A)auditor is not appointed until after the client's year-end.
B)client won't allow the auditor to confirm receivables for fear of offending its customers.
C)auditor doesn't have enough staff to satisfactorily audit all of the client's foreign subsidiaries.
D)client is going through Chapter 11 bankruptcy.

Accepted Answer

When an auditor is appointed after the client's year-end, certain auditing procedures that should ideally be performed at or before year-end (such as observing inventory counts) cannot be carried out, leading to a scope restriction that is beyond the control of both the client and the auditor.

Question 10

When a client fails to follow GAAP, the audit report can be unqualified, qualified, or adverse depending on the materiality.What factors affect materiality that an auditor should consider?
A)The dollar amount in comparison to a base
B)If the misstatement can be measured
C)The nature of the item
D)All the above are factors an auditor should consider regarding materiality.

Accepted Answer

All the factors mentioned in A, B, and C affect materiality and should be considered by the auditor. Materiality is the amount of misstatement that can influence the decisions of the users of the financial statements, and it depends on the significance, nature, and circumstances of the misstatement. The dollar amount in comparison to a base (like revenues, net income, or total assets), the measurability of the misstatement, and the nature of the item (like revenue, expense, asset, liability, or equity) are relevant factors that the auditor should assess to determine materiality.

Question 11

In which of the following circumstances would an auditor most likely express an adverse opinion?
A)The CEO refuses to let the auditor have access to the board of director meeting minutes.
B)The financial statements are not in conformity with the FASB statement on loss contingencies.
C)Information comes to the auditor's attention that raises substantial doubt about the ability for the client to continue as a going concern.
D)Tests of controls show that the internal control structure is so poor that the auditor has to assess control risk at the maximum.

Accepted Answer

An adverse opinion is expressed when the financial statements materially depart from accounting standards and are not fairly presented. In this case, not conforming to the FASB statement on loss contingencies would be a basis for an adverse opinion because it indicates that the financial statements do not accurately reflect the company's financial position according to generally accepted accounting principles (GAAP).

Question 12

An auditor should issue a qualified opinion with an explanatory paragraph whenever there is a material uncertainty affecting the financial statements.

Accepted Answer

An auditor may issue a qualified opinion if there is a material misstatement that is not pervasive. However, for material uncertainties that cast significant doubt on the entity's ability to continue as a going concern, the auditor would add an emphasis-of-matter paragraph to the audit report, not necessarily issue a qualified opinion.

Question 13

When the client fails to make adequate disclosure in the body of the statements or in the related footnotes, it is the responsibility of the auditor to:
A)inform the reader that disclosure is not adequate, and to issue an adverse opinion.
B)inform the reader that disclosure is not adequate, and to issue a qualified opinion.
C)present the information in the audit report and issue an unqualified or qualified opinion.
D)present the information in the audit report and to issue a qualified or an adverse opinion.

Accepted Answer

If the client fails to disclose adequate information in the financial statements or related footnotes, the auditor is required to present the information in the audit report, either by issuing a qualified or an adverse opinion. The choice between a qualified or adverse opinion depends on the materiality of the non-disclosure and whether it affects the overall fairness of the financial statements. Therefore, option D is the best choice. Options A and B are incorrect because merely informing the reader that disclosure is not adequate is insufficient; the auditor must also provide the necessary information in the audit report. Option C is also incorrect because it does not distinguish between an unqualified opinion and a qualified opinion, which the auditor may need to issue depending on the materiality of the non-disclosure.

Question 14

Client imposed restrictions on the audit always require a disclaimer of opinion.

Accepted Answer

Client-imposed restrictions on the audit may lead to a disclaimer of opinion if the restrictions prevent the auditor from obtaining sufficient appropriate audit evidence. However, auditors may also consider other types of opinions or modify their report depending on the nature and extent of the restrictions and the ability to obtain sufficient evidence through alternative procedures.

Question 15

Whenever an auditor issues a qualified report, he or she must use the term "except for " in the opinion paragraph.

Accepted Answer

This is true. When an auditor issues a qualified report, they must use the term "except for" in the opinion paragraph to indicate that they are unable to express an unqualified opinion on the financial statements.

Question 16

When comparing misstatements with a measurement base, the auditor must consider the pervasiveness of the misstatement.Of the following examples, the most pervasive misstatement is a(n):
A)understatement of inventory.
B)understatement of retained earnings caused by a miscalculation of dividends payable.
C)misclassification of notes payable as a long-term liability when it should be current.
D)misclassification of salary expense as a selling expense.

Accepted Answer

An understatement of inventory affects multiple accounts, including cost of goods sold, gross profit, and net income. Therefore, it is the most pervasive misstatement. The other examples are more isolated and do not have as wide of an impact on the financial statements.

Question 17

There are three conditions necessitating a departure from an unqualified audit report.Name, discuss and state the appropriate audit report for each of these three conditions.

Accepted Answer

The answer of There are three conditions necessitating a departure...

Question 18

When an auditor discovers a highly material GAAP violation in the financial statements and the client refuses to correct it, the auditor should issue a disclaimer of opinion.

Accepted Answer

When an auditor discovers a highly material GAAP violation and the client refuses to correct it, the auditor should issue an adverse opinion, not a disclaimer of opinion. A disclaimer of opinion is issued when the auditor cannot form an opinion on the financial statements, whereas an adverse opinion is issued when the financial statements materially misrepresent the financial position of the company.

Question 19

A qualified audit report is issued when all auditing conditions have been met, no significant misstatements have been discovered, and it is the auditor's opinion that the financial statements are fairly stated in accordance with GAAP.

Accepted Answer

A qualified audit report is issued when there are exceptions to the accounting principles or limitations on the scope of the audit, but the financial statements are still mostly in accordance with GAAP.

Question 20

Misstatements must be compared with some measurement base before a decision can be made about materiality.A commonly accepted measurement base includes:
A)net income.
B)total assets.
C)working capital.
D)all of the above.

Accepted Answer

All of the above are commonly accepted measurement bases for materiality. However, the specific measurement base chosen may vary depending on the circumstances of the entity and the nature of the misstatement.

Quiz 3: Audit Reports

If most or all users' decisions that are based on the financial statements are likely to be significantly affected, the materiality level is:

Which of the following scenarios does not result in a qualified opinion?

A qualified report can take the form of a qualification of both the scope and the opinion or of the opinion alone.

The dollar amount of some misstatements cannot be accurately measured.For example, if the client were unwilling to disclose an existing lawsuit, the auditor must estimate the likely effect on:

Auditors should issue a disclaimer of opinion when there is a highly material client-imposed scope restriction.

Whenever the client imposes restrictions on the scope of the audit, the auditor should be concerned that management may be trying to prevent discovery of misstatements.In such cases, the auditor will likely issue a:

A misstatement in the financial statements can be considered material if knowledge of the misstatement will affect a decision of:

Which of the following statements is true? I.The auditor is required to issue a disclaimer of opinion in the event of a material uncertainty. II.The auditor is required to issue a disclaimer of opinion in the event of a going concern problem.

The most common case in which conditions beyond the client's and auditor's control cause a scope restriction in an engagement is when the:

When a client fails to follow GAAP, the audit report can be unqualified, qualified, or adverse depending on the materiality.What factors affect materiality that an auditor should consider?

In which of the following circumstances would an auditor most likely express an adverse opinion?

An auditor should issue a qualified opinion with an explanatory paragraph whenever there is a material uncertainty affecting the financial statements.

When the client fails to make adequate disclosure in the body of the statements or in the related footnotes, it is the responsibility of the auditor to:

Client imposed restrictions on the audit always require a disclaimer of opinion.

Whenever an auditor issues a qualified report, he or she must use the term "except for " in the opinion paragraph.

When comparing misstatements with a measurement base, the auditor must consider the pervasiveness of the misstatement.Of the following examples, the most pervasive misstatement is a(n) :

There are three conditions necessitating a departure from an unqualified audit report.Name, discuss and state the appropriate audit report for each of these three conditions.

When an auditor discovers a highly material GAAP violation in the financial statements and the client refuses to correct it, the auditor should issue a disclaimer of opinion.

A qualified audit report is issued when all auditing conditions have been met, no significant misstatements have been discovered, and it is the auditor's opinion that the financial statements are fairly stated in accordance with GAAP.

Misstatements must be compared with some measurement base before a decision can be made about materiality.A commonly accepted measurement base includes: