Question 1

Abbot, CPA, as principal auditor for consolidated financial statements, is using a qualified report of another auditor. Abbot does not consider the qualification material relative to the consolidated financial statements and Abbot is willing to accept responsibility for the work of the other auditor. What recognition, if any, must Abbot make in his report to the report of the other audit?
A)He need make no reference.
B)He must refer to the qualification of the other auditor and qualify his report likewise.
C)He must include the other auditor's report with his report but need not qualify his report.
D)He must include the other auditor's report with his report and give an explanation of its significance.

Accepted Answer

If Abbot does not consider the qualification material relative to the consolidated financial statements and is willing to accept responsibility for the work of the other auditor, he need not make any reference to the report of the other auditor in his report.

Question 2

Which of the following would not require an explanatory/emphasis-of-matter paragraph in the auditor's report?
A)Required supplementary information is omitted or departs materially from the requirement of the applicable financial reporting framework.
B)Lack of comparability in the financial statements due to accounting changes.
C)Going concern.
D)Opinion based in part on the report of another auditor.

Accepted Answer

When an auditor's opinion is based in part on the report of another auditor, the principal auditor may include a reference to the other auditor in the auditor's report, but an explanatory or emphasis-of-matter paragraph is not necessary unless there is a material issue with the other auditor's report. On the other hand, options A, B, and C are all situations that would require an explanatory/emphasis-of-matter paragraph in the auditor's report.

Question 3

When the auditor is unable to determine the amounts associated with the illegal acts of entity personnel because of an inability to obtain adequate evidence, the auditor should issue a(n):
A)"subject to" qualified opinion.
B)disclaimer of opinion.
C)adverse opinion.
D)unqualified opinion with a separate explanatory/emphasis-of-matter paragraph.

Accepted Answer

When the auditor is unable to obtain sufficient evidence to determine the amounts associated with illegal acts of entity personnel, a disclaimer of opinion is appropriate. This is because the auditor is unable to obtain reasonable assurance about the financial statements as a whole, and is not able to express an opinion on the financial statements.

Question 4

When an auditor expresses an adverse opinion, the opinion paragraph should include:
A)the principal effects of the departure from generally accepted accounting principles.
B)a statement that the financial statements do not present fairly.
C)the substantive reasons for the financial statements being misleading.
D)a description of the uncertainty or scope limitation that prevents an unqualified opinion.

Accepted Answer

When an auditor expresses an adverse opinion, the opinion paragraph should state that the financial statements do not present fairly in accordance with generally accepted accounting principles. This is the principal reason for an adverse opinion. The other options are more applicable for a qualified opinion or disclaimer of opinion.

Question 5

Which of the following would be considered a change that does not affect comparability?
A)Change in accounting estimate.
B)Change in accounting principle.
C)Correction of principle material misstatement in previously issued financial statements.
D)None of these are considered changes that do not affect comparability.

Accepted Answer

A change in accounting estimate does not affect comparability as it reflects a new estimate based on new or updated information, rather than a change in how an item is accounted for.

Question 6

Auditing standards define special purpose financial statements as including those prepared under the following basis(es):
A)regulatory basis.
B)tax basis.
C)contractual basis.
D)regulatory basis, tax basis, and contractual basis.

Accepted Answer

According to auditing standards, special purpose financial statements include those prepared under regulatory basis, tax basis, and contractual basis. Therefore, the best choice is D.

Question 7

When are an auditor's reporting responsibilities not met by attaching an explanation of the circumstances and a disclaimer of opinion to the entity's financial statement?
A)When the independent auditor with sufficient appropriate evidence believes the financial statements are not prepared in accordance with GAAP.
B)When the auditor was unable to observe the taking of the physical inventory.
C)When the auditor is not independent.
D)When the auditor has performed insufficient auditing procedures to express an opinion.

Accepted Answer

Attaching an explanation of the circumstances and a disclaimer of opinion is only appropriate when the auditor is unable to form an opinion on the financial statements due to limitations on the scope of the audit or lack of independence. If the auditor has sufficient appropriate evidence to believe that the financial statements are not prepared in accordance with GAAP, then a disclaimer of opinion with explanation does not meet the reporting responsibilities.

Question 8

The predecessor auditor, after properly communicating with the successor auditor, has reissued a report because the entity desires comparative financial statements. The predecessor auditor's report should make:
A)no reference to the report or the work of the successor auditor.
B)reference to the work of the successor auditor in the scope paragraph.
C)reference to both the work and the report of the successor auditor in the opinion paragraph.
D)reference to the report of the successor auditor in the scope paragraph.

Accepted Answer

When a predecessor auditor reissues a report for the purpose of presenting comparative financial statements, the report should not make any reference to the work or report of the successor auditor. The predecessor's report should focus solely on the financial statements for the period they audited.

Question 9

Comparative financial statements include the financial statements of a prior period that were examined by a predecessor auditor whose report is not presented. If the predecessor auditor's report was qualified, the successor auditor must:
A)obtain written approval from the predecessor auditor to include the prior year's financial statements.
B)issue a standard comparative audit report indicating the division of responsibility.
C)express an opinion on the current year statements alone and make no reference to the prior year statements.
D)disclose the nature of and reasons for any qualification in the predecessor auditor's opinion.

Accepted Answer

The successor auditor should disclose the nature of and reasons for any qualification in the predecessor auditor's opinion when the predecessor's report is not presented but the financial statements they audited are included for comparative purposes. This ensures that users of the financial statements are aware of any issues that affected the prior period's audit opinion.

Question 10

When an auditor concludes there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time, the auditor's responsibility is to:
A)prepare prospective financial information to verify whether management's plans can be effectively implemented.
B)project future conditions and events for a period of time not to exceed one year following the date of the financial statements.
C)issue a qualified or adverse opinion, depending upon materiality, because of the possible effects on the financial statements.
D)consider the adequacy of disclosure about the entity's possible inability to continue as a going concern.

Accepted Answer

When an auditor identifies substantial doubt regarding an entity's ability to continue as a going concern, the auditor's responsibility is to consider the adequacy of disclosure about the entity's possible inability to continue as a going concern in the financial statements. The auditor may issue an unqualified opinion with explanatory language or a qualified/adverse opinion depending on the materiality of the uncertainty and adequacy of disclosure. The auditor is not responsible for preparing prospective financial information or projecting future conditions and events beyond the financial statement date.

Question 11

When the entity fails to include information that is necessary for the fair presentation of financial statements in the body of the statements or in the related footnotes, it is the responsibility of the auditor to present the nature and impact of the faulty accounting or misstatement in the auditor's report and express a(n):
A)qualified opinion or a disclaimer of opinion.
B)qualified opinion or an adverse opinion.
C)adverse opinion or a disclaimer of opinion.
D)qualified opinion or an unqualified opinion.

Accepted Answer

When an entity omits information necessary for fair presentation, the auditor may issue a qualified opinion if the misstatement is material but not pervasive. If the omission is both material and pervasive, an adverse opinion is appropriate. This reflects the auditor's judgment on the financial statements' overall fairness.

Question 12

In the auditor's report, the principal auditor decides not to make reference to another CPA who audited an entity's subsidiary. The principal auditor could justify this decision if, among other requirements, the principal auditor:
A)issues an unqualified opinion on the consolidated financial statements.
B)learns that the other CPA issued an unqualified opinion on the subsidiary's financial statements.
C)is unable to review the other CPA's audit programs and working papers.
D)is satisfied as to the other CPA's independence and professional reputation.

Accepted Answer

The principal auditor can decide not to make reference to another CPA if they are satisfied with the other CPA's independence and professional reputation. This indicates trust in the quality of the other CPA's work, making it unnecessary to mention them in the audit report.

Question 13

Which of the following would be considered a change that affects comparability and requires an explanatory paragraph?
A)Change in accounting estimate.
B)Change in accounting principle.
C)Change in classification from one acceptable classification to another.
D)All of the other options are correct.

Accepted Answer

A change in accounting principle results in a change in the way an item is recognized, measured or presented in the financial statements. This affects comparability with prior periods and hence requires an explanatory paragraph in the financial statements. A change in accounting estimate or classification may also affect comparability, but these changes may not necessarily require an explanatory paragraph, depending on the materiality of the change and the context in which it occurs. Therefore, option D is incorrect. Option C may be incorrect, as a change in classification may or may not affect comparability, depending on the circumstances.

Question 14

When reporting on comparative financial statements where the financial statements of the prior year have been examined by a predecessor auditor whose report is not presented, the successor auditor should make:
A)no reference to the predecessor auditor.
B)reference to the predecessor auditor only if the predecessor auditor expressed a qualified opinion.
C)reference to the predecessor auditor only if the predecessor auditor expressed an unqualified opinion.
D)reference to the predecessor auditor in an explanatory paragraph regardless of the type of opinion expressed by the predecessor auditor.

Accepted Answer

When reporting on comparative financial statements where the financial statements of the prior year have been examined by a predecessor auditor whose report is not presented, the successor auditor should make reference to the predecessor auditor in an explanatory paragraph regardless of the type of opinion expressed by the predecessor auditor. This is in accordance with Generally Accepted Auditing Standards (GAAS) which requires the successor auditor to adequately disclose the fact that the prior year's financial statements were audited by a different auditor. This helps to ensure transparency and consistency in financial reporting.

Question 15

If a public company issues financial statements that purport to present its financial position and results of operations but omits the statement of cash flows, the auditor ordinarily will express a(n):
A)disclaimer of opinion.
B)qualified opinion.
C)review report.
D)unqualified opinion with a separate explanatory paragraph.

Accepted Answer

The omission of the statement of cash flows from a complete set of financial statements is a departure from generally accepted accounting principles (GAAP). As such, the auditor would typically express a qualified opinion, indicating that, except for the missing statement of cash flows, the financial statements present the company's financial position and results of operations in accordance with GAAP.

Question 16

An auditor includes a separate paragraph in an otherwise unmodified report to emphasize that the entity being reported on had significant transactions with related parties. The inclusion of this separate paragraph:
A)is considered an "except for" qualification of the opinion.
B)violates generally accepted auditing standards if this information is already disclosed in footnotes to the financial statements.
C)necessitates a revision of the opinion paragraph to include the phrase "with the foregoing explanation."
D)is appropriate and would not negate the unqualified opinion.

Accepted Answer

Including a separate paragraph to emphasize significant related party transactions is a required disclosure under auditing standards, and thus, would not negate the unqualified opinion. This disclosure helps ensure that financial statement users are aware of the potential for conflicts of interest and the risks associated with related party transactions. The auditor may also include this information in the footnotes, but a separate paragraph may provide greater emphasis and clarity.

Question 17

Other bases of accounting (special purpose frameworks)include all of the following except:
A)tax basis.
B)non-GAAP methods used for internal reporting.
C)cash basis.
D)regulatory basis.

Accepted Answer

All of the other options listed (tax basis, cash basis, and regulatory basis) are examples of special purpose frameworks that may be used in certain circumstances. Non-GAAP methods for internal reporting are not typically considered a formal basis of accounting, but rather a management tool for monitoring and analyzing financial performance.

Question 18

An auditor would issue an adverse opinion if:
A)the audit was begun by other independent auditors who withdrew from the engagement.
B)a qualified opinion cannot be given because the auditor lacks independence.
C)a restriction on the scope of the audit was significant.
D)the statements taken as a whole do not fairly present the financial condition and results of operations of the company.

Accepted Answer

An adverse opinion is issued when the auditor concludes that the financial statements, taken as a whole, do not fairly present the financial condition and results of operations of the company. This is considered the most negative type of auditor's opinion.

Question 19

An auditor concludes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. If the entity's financial statements adequately disclose its financial difficulties, the auditor's report is required to include an explanatory/emphasis-of-matter paragraph that specifically uses the phrase(s):
A)"reasonable period of time, not to exceed one year" and "going concern."
B)"reasonable period of time, not to exceed one year" but not "going concern."
C)"going concern" but not "reasonable period of time, not to exceed one year."
D)neither "going concern" nor "reasonable period of time, not to exceed one year."

Accepted Answer

The auditor's report should include an explanatory or emphasis-of-matter paragraph that uses the phrase "going concern" to highlight the substantial doubt about the entity's ability to continue as a going concern. The specific time frame of "reasonable period of time, not to exceed one year" is typically considered in the assessment but is not required to be explicitly mentioned in the auditor's report.

Question 20

An auditor was unable to obtain audited financial statements or other evidence supporting an entity's material investment in a large foreign subsidiary. Between which of the following reports should the auditor choose?
A)Adverse and unqualified with an explanatory/emphasis-of-matter paragraph added.
B)Disclaimer and unqualified with an explanatory/emphasis-of-matter paragraph added.
C)Qualified and adverse.
D)Qualified and disclaimer.

Accepted Answer

The auditor should choose between a qualified opinion and a disclaimer of opinion. A qualified opinion is issued when the auditor concludes that, except for the effects of the matter(s) to which the qualification relates, the financial statements are presented fairly. A disclaimer of opinion is issued when the auditor is unable to obtain sufficient appropriate audit evidence and concludes that the possible effects on the financial statements could be both material and pervasive.

Quiz 18: Reports on Audited Financial Statements

Which of the following would not require an explanatory/emphasis-of-matter paragraph in the auditor's report?

When the auditor is unable to determine the amounts associated with the illegal acts of entity personnel because of an inability to obtain adequate evidence, the auditor should issue a(n) :

When an auditor expresses an adverse opinion, the opinion paragraph should include:

Which of the following would be considered a change that does not affect comparability?

Auditing standards define special purpose financial statements as including those prepared under the following basis(es) :

When are an auditor's reporting responsibilities not met by attaching an explanation of the circumstances and a disclaimer of opinion to the entity's financial statement?

The predecessor auditor, after properly communicating with the successor auditor, has reissued a report because the entity desires comparative financial statements. The predecessor auditor's report should make:

Comparative financial statements include the financial statements of a prior period that were examined by a predecessor auditor whose report is not presented. If the predecessor auditor's report was qualified, the successor auditor must:

When an auditor concludes there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time, the auditor's responsibility is to:

In the auditor's report, the principal auditor decides not to make reference to another CPA who audited an entity's subsidiary. The principal auditor could justify this decision if, among other requirements, the principal auditor:

Which of the following would be considered a change that affects comparability and requires an explanatory paragraph?

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

If a public company issues financial statements that purport to present its financial position and results of operations but omits the statement of cash flows, the auditor ordinarily will express a(n) :

An auditor includes a separate paragraph in an otherwise unmodified report to emphasize that the entity being reported on had significant transactions with related parties. The inclusion of this separate paragraph:

Other bases of accounting (special purpose frameworks) include all of the following except:

An auditor would issue an adverse opinion if:

An auditor was unable to obtain audited financial statements or other evidence supporting an entity's material investment in a large foreign subsidiary. Between which of the following reports should the auditor choose?