Question 1

A predecessor auditor should complete the following before reissuing a report on statements presented on a comparative basis:
A)read the financial statements of the current period.
B)read the financial statements of the past five years.
C)obtain a letter of representations from the current-year, successor auditor.
D)read the financial statements of the current period and obtain a letter of representation from the management of the entity and from the current-year, successor auditor.

Accepted Answer

Before reissuing a report on statements presented on a comparative basis, the predecessor auditor should read the financial statements of the current period and obtain a letter of representation from the management of the entity and from the current-year, successor auditor. Reading the financial statements of the past five years (option B) is not necessary and obtaining a letter of representation from the current-year, successor auditor (option C) is already included in option D. Therefore, option D is the best choice.

Question 2

If the auditor believes that there is minimal likelihood that resolution of an uncertainty will have a material effect on the financial statements, the auditor would issue a(n):
A)"except for" opinion.
B)adverse opinion.
C)unqualified opinion.
D)disclaimer of opinion.

Accepted Answer

If the auditor believes that there is minimal likelihood that resolution of an uncertainty will have a material effect on the financial statements, the auditor would issue an unqualified opinion, indicating that the financial statements are presented fairly in all material respects.

Question 3

For which of the following events would an auditor issue a report that does not include any reference to comparability?
A)A change in the method of accounting for inventories.
B)A change from an accounting principle that is not generally accepted to one that is generally accepted.
C)A change in the service life used to calculate depreciation expense.
D)A correction of a material misstatement in previously issued financial statements.

Accepted Answer

A change in the service life used to calculate depreciation expense is considered a change in accounting estimate, not a change in accounting principle, and does not affect the comparability of financial statements.

Question 4

A scope limitation results from an inability to obtain sufficient appropriate evidence about some component of the financial statements.

Accepted Answer

This statement is true. A scope limitation occurs when the auditor is unable to gather enough evidence about a specific area of the financial statements, which can lead to uncertainty and potentially affect the auditor's opinion on the overall accuracy of the statements.

Question 5

In connection with the examination of the consolidated financial statements of Mott Industries, Frazier, CPA, plans to refer to another CPA's examination of the financial statements of a subsidiary company. Under these circumstances, Frazier's report must disclose:
A)the name of the other CPA and the type of report issued by the other CPA.
B)the portion of the financial statements examined by the other CPA.
C)the nature of Frazier's review of the other CPA's work.
D)in a footnote the portions of the financial statements that were covered by the examinations of both auditors.

Accepted Answer

When a principal auditor decides to make reference to another auditor's work in their report, it is necessary to disclose the portion of the financial statements that was examined by the other auditor. This helps users of the financial statements understand the division of responsibility between the auditors involved.

Question 6

Which of the following parties is responsible for the fairness of the representations made in financial statements?
A)Entity's management.
B)Independent auditor.
C)Audit committee.
D)AICPA.

Accepted Answer

The entity's management is ultimately responsible for the accuracy and fairness of the representations made in financial statements, as they are the ones who prepare and present the statements. However, the independent auditor also plays a role in ensuring the accuracy and fairness of the financial statements by providing an audit opinion on them. The audit committee typically oversees the financial reporting process to ensure it is adequate and effective, while the AICPA is a professional organization for accountants and does not have a direct role in the preparation or audit of financial statements.

Question 7

If the principal auditor decides to make reference to the other auditor's audit, the opinion section must specifically indicate the:
A)portion of the financial statements examined by the other auditor.
B)name of the other auditor.
C)name of the consolidated subsidiary examined by the other auditor.
D)type of opinion expressed by the other auditor.

Accepted Answer

When the principal auditor decides to make reference to the work of another auditor, the opinion section of the audit report must specifically indicate the portion of the financial statements that was examined by the other auditor. This is to ensure clarity and transparency about the division of responsibilities regarding the audit work performed.

Question 8

A change in accounting estimate is an example of an accounting change that affects comparability and requires an explanatory paragraph in the audit report.

Accepted Answer

A change in accounting estimate is a normal part of the financial reporting process and does not typically require an explanatory paragraph in the audit report, as it does not affect the comparability of financial statements in a way that necessitates such disclosure.

Question 9

An auditor may be unable to express an unqualified opinion if an immaterial departure from GAAP is present in the financial statements.

Accepted Answer

An auditor can only issue an unqualified opinion if the financial statements are presented fairly in accordance with GAAP. Any departure, even if immaterial, would require the auditor to assess the impact on the financial statements and consider if a qualification or disclaimer of opinion is necessary.

Question 10

When comparative financial statements are presented, the auditor's report should be considered to apply to the financial statements of the:
A)periods presented plus the one preceding period.
B)current period only.
C)current period and those of the other periods presented.
D)current and immediately preceding period only.

Accepted Answer

When comparative financial statements are presented, the auditor's report should apply to the current period and those of the other periods presented. This means that the auditor's report covers all periods presented in the comparative financial statements. It would not be accurate to limit the application of the auditor's report to the current period only or to a limited number of preceding periods.

Question 11

Changes that affect comparability but that do not involve a change in accounting principle or the correction of a misstatement are normally disclosed in the footnotes but do not require an explanatory paragraph in the audit report.

Accepted Answer

This statement is true. Changes that affect comparability but do not involve a change in accounting principle or the correction of a misstatement are referred to as "consistent changes in accounting estimate" and are typically disclosed in the footnotes of financial statements but do not require an explanatory paragraph in the audit report.

Question 12

Which of the following situations will not result in modification of the auditor's report because of a scope limitation?
A)Restriction imposed by the client.
B)Reliance placed on the report of another auditor.
C)Inability to obtain sufficient appropriate evidential matter.
D)Restriction caused by the circumstance of the engagement.

Accepted Answer

Reliance placed on the report of another auditor does not result in a scope limitation for the auditor issuing the report. This situation is addressed through referencing the other auditor's report and considering whether it is appropriate to rely on it. The other options (A, C, and D) all involve circumstances that may result in a scope limitation and could require modification of the auditor's report.

Question 13

Management believes, and the auditor is satisfied, that a material loss probably will occur when pending litigation is resolved. Management is unable to make a reasonable estimate of the amount or range of the potential loss, but fully discloses the situation in the notes to the financial statements. If the auditor wishes to call attention to the matter and management does not make an accrual in the financial statements, the auditor should issue a(n):
A)qualified report due to a scope limitation.
B)qualified report due to a departure from GAAP.
C)unqualified report with an explanatory paragraph.
D)standard unmodified auditor's report.

Accepted Answer

The situation described in the scenario is an example of a contingency that cannot be reasonably estimated, and therefore, is disclosed in the notes to the financial statements. In such a case, the auditor should issue an unqualified report with an explanatory paragraph drawing attention to the disclosure. This is known as an emphasis-of-matter paragraph and is used to draw attention to matters that are appropriately disclosed in the financial statements. A qualified report is not appropriate in this scenario, as there is no departure from GAAP, and there is no scope limitation.

Question 14

A correction of a material misstatement in previously issued financial statements is an example of an accounting change that affects comparability and requires an explanatory paragraph in the audit report.

Accepted Answer

This statement is true. A material misstatement correction is considered to be an accounting change that affects comparability and must be disclosed in the audit report with an explanatory paragraph.

Question 15

A basic assumption that underlies financial reporting is that an entity will continue as a going concern.

Accepted Answer

The going concern assumption is a fundamental principle of accounting and financial reporting, which assumes that entities will continue to operate in the foreseeable future. This assumption helps to provide a basis for assessing the entity's financial position, performance, and cash flow, as well as the value of its assets and liabilities. However, if this assumption is not appropriate, the financial statements may need to be prepared on a different basis, such as liquidation or going concern basis.

Question 16

The choice of which audit report to issue depends on the nature and the materiality of the condition giving rise to the departure.

Accepted Answer

The choice of the audit report depends on the nature and materiality of the condition giving rise to the departure. Factors such as the significance of the departure and its impact on the overall financial statements will also need to be considered by the auditor before determining the appropriate type of audit report to issue.

Question 17

A going concern issue requires an explanatory paragraph to be added to the standard unqualified audit report (public company).

Accepted Answer

A going concern issue represents a significant uncertainty that may affect the company's ability to continue operating as a going concern (i.e., for at least the next twelve months from the report date). Therefore, the auditor must assess the company's ability to continue as a going concern and may need to modify the audit report by adding an explanatory paragraph to inform users of the financial statements about the going concern issue. The paragraph should describe the nature of the issue, management's plan to address it, and the auditor's opinion on whether the financial statements are fairly presented despite the going concern uncertainty. Such a report is known as a "qualified opinion with a going concern explanatory paragraph."

Question 18

An auditor must disclaim an opinion when the auditor lacks independence.

Accepted Answer

According to auditing standards, an auditor must be independent in both fact and appearance in order to issue an opinion on the financial statements. If the auditor lacks independence, they cannot issue an opinion and must issue a disclaimer of opinion instead.

Question 19

An opinion based in part on the report of another auditor requires an explanatory/emphasis-of-matter paragraph be added to the standard unqualified audit report.

Accepted Answer

An opinion based in part on the report of another auditor does not automatically require an explanatory/emphasis-of-matter paragraph in the standard unqualified audit report. Instead, reference to the work of the other auditor may be made in the auditor's responsibility section, without necessitating an emphasis-of-matter paragraph.

Question 20

When the audited financial statements of the prior year are presented together with those of the current year, the continuing auditor's report should cover:
A)both years.
B)only the current year.
C)only the current year, but the prior year's report should be presented.
D)only the current year, but the prior year's report should be referred to.

Accepted Answer

When the audited financial statements of the prior year are presented together with those of the current year, the continuing auditor's responsibility extends to both sets of financial statements, hence the auditor's report should cover both years. This ensures that users of the financial statements receive a comprehensive view of the financial performance and position over the two-year period, with the auditor's opinion applying to both.

Quiz 18: Reports on Audited Financial Statements

A predecessor auditor should complete the following before reissuing a report on statements presented on a comparative basis:

If the auditor believes that there is minimal likelihood that resolution of an uncertainty will have a material effect on the financial statements, the auditor would issue a(n) :

For which of the following events would an auditor issue a report that does not include any reference to comparability?

A scope limitation results from an inability to obtain sufficient appropriate evidence about some component of the financial statements.

In connection with the examination of the consolidated financial statements of Mott Industries, Frazier, CPA, plans to refer to another CPA's examination of the financial statements of a subsidiary company. Under these circumstances, Frazier's report must disclose:

Which of the following parties is responsible for the fairness of the representations made in financial statements?

If the principal auditor decides to make reference to the other auditor's audit, the opinion section must specifically indicate the: