Question 1

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

Accepted Answer

The inability to physically examine inventory due to management's refusal constitutes a scope limitation imposed by the client, which prevents the auditor from completing the audit in accordance with Generally Accepted Auditing Standards (GAAS). This situation leads to a modification of the auditor's report because the auditor cannot obtain sufficient appropriate audit evidence about certain aspects of the financial statements.

Question 2

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.

Accepted Answer

Changes in reporting entities do affect consistency and therefore require an explanatory paragraph in the audit report.

Question 3

In which situation would the auditor be choosing between "except for" qualified opinion and an adverse opinion?

Accepted Answer

A lack of full disclosure within the footnotes can lead to either a qualified opinion if the issue is not pervasive or an adverse opinion if the issue is pervasive and materially affects the financial statements.

Question 4

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

Accepted Answer

An unmodified opinion audit report with an emphasis-of-matter paragraph still indicates that the financial statements present fairly, in all material respects, the financial position of the entity. The emphasis-of-matter paragraph is simply used to draw attention to a matter appropriately presented or disclosed in the financial statements that is of such importance that it is fundamental to users’ understanding of the financial statements.

Question 5

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.

Accepted Answer

Changes in estimates do not affect consistency or comparability in a way that requires an explanatory paragraph in the audit report; they are a normal part of business operations and accounting practices.

Question 6

If the auditor lacks independence, a disclaimer of opinion must be issued

Accepted Answer

According to auditing standards, if the auditor lacks independence, a disclaimer of opinion must be issued in all cases. This is because the lack of independence undermines the credibility and reliability of the auditor's work and the resulting report. Therefore, independence is a fundamental requirement for an audit opinion to be issued.

Question 7

An adverse opinion is issued when the auditor believes

Accepted Answer

An adverse opinion is issued when the overall financial statements are so materially misstated that they do not present fairly the financial position or results of operations and cash flows in conformity with GAAP. This is the most severe type of audit opinion and suggests serious problems with the company's financial reporting.

Question 8

An auditor can express a qualified opinion due to a

Accepted Answer

The answer of An auditor can express a qualified opinion...

Question 9

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

Accepted Answer

Items that materially affect the comparability of the financial statements require disclosure in the footnotes according to accounting principles.

Question 10

An auditor determines the financial statements include at least a material departure from GAAP. Which type of opinion may be issued?

Accepted Answer

The answer of An auditor determines the financial statements include...

Question 11

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

Accepted Answer

Changes in accounting estimates are a normal part of the accounting process and do not typically require a modified audit report or a consistency paragraph, as they are not considered inconsistencies in the application of accounting principles.

Question 12

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.

Accepted Answer

The answer of Discuss each of the five circumstances when...

Question 13

When the auditor determines that the financial statements are fairly stated, but there is a nonindependent relationship between the auditor and the client, the auditor should issue

Accepted Answer

A disclaimer of opinion is issued when the auditor is not able to form an opinion on the financial statements, which can be due to a lack of independence or other significant uncertainties.

Question 14

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.

Accepted Answer

When a CPA firm relies on another firm to perform part of the audit and chooses to issue a shared opinion, both the auditor's responsibility paragraph and the opinion paragraph should be modified. The modification should make it clear that another firm was involved in performing part of the audit and that the opinion is based on work performed by both firms.

Question 15

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.

Accepted Answer

An emphasis-of-matter paragraph in an audit report is used to draw attention to a matter that is included in the financial statements but is of such importance that it is fundamental to the users' understanding of the financial statements. This paragraph is not used to indicate that the financial statements are not fairly stated but rather to highlight a matter of significance that users should consider when reviewing the financial statements. Therefore, if an emphasis-of-matter paragraph is included in an unmodified opinion audit report, it indicates that the auditor believes the financial statements are fairly stated but that additional information should be provided to help users better understand the financial statements.

Question 16

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

Accepted Answer

When there is a lack of consistent application of GAAP due to a new accounting pronouncement, an explanatory paragraph is required in the auditor's report.

Question 17

A qualified opinion can be issued for which of the following?
I. When a limitation on the scope of the audit has occurred
II. When the auditor lacks independence
III. When generally accepted accounting principles have not been used

Accepted Answer

A qualified opinion can be issued when there is a limitation on the scope of the audit or if generally accepted accounting principles have not been used. However, lack of independence would result in an adverse opinion or a disclaimer of opinion.

Question 18

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.

Accepted Answer

When other auditors are involved, the audit report can include modifications beyond the introductory paragraph, such as in the auditor's responsibility section, to indicate the division of responsibility between the principal auditor and the other auditors.

Question 19

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

Accepted Answer

According to PCOAB standards, the primary auditor issuing the opinion on the financial statements is called the principal auditor. The component auditor is the auditor of a subsidiary, division, or component of an entity whose financial information is included in the financial statements audited by the principal auditor. The group engagement partner is the auditor responsible for the group audit engagement and the majority auditor is not a term defined by PCOAB standards.

Question 20

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.

Accepted Answer

The principal auditor is responsible for evaluating the work of other auditors and must determine if any qualifications or issues are material to the financial statements as a whole. This determination is important for ensuring that the financial statements provide a fair and accurate representation of the organization's financial position and performance.

Quiz 3: Audit Reports