Question 1

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 results in a disclaimer of opinion, not a qualified opinion. A qualified opinion occurs when the auditors are unable to gather enough evidence to form an unqualified opinion but there are no serious doubts about the financial statements. A scope limitation or a departure from GAAP may result in a qualified opinion, but not lack of independence.

Question 2

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 can be considered material if it would influence a reasonable user's decision-making process. The other options listed (PCAOB, accountant, SEC) are entities that may have a role in reviewing or regulating financial statements, but they are not the primary users of the information.

Question 3

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

Accepted Answer

Auditors should issue a disclaimer of opinion when there is a highly material client-imposed scope restriction because the restriction prevents them from obtaining sufficient appropriate audit evidence to support the opinion on the financial statements.

Question 4

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 5

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 6

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 7

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 8

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 9

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

The answer of A qualified audit report is issued when...

Question 10

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

Materiality is considered pervasive when it affects the decisions of users on the basis of the financial statements in a significant manner. This means that the issue is so significant that it could influence the economic decisions of users made on the basis of the financial statements.

Question 11

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 make adequate disclosure, it is the responsibility of the auditor to ensure that the information is presented in the audit report. However, the auditor may issue a qualified or adverse opinion, depending on the extent and materiality of the inadequacy of disclosure. Therefore, D is the best choice as it includes both qualified and adverse opinions.

Question 12

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 indeed take the form of a qualification of both the scope and the opinion or of the opinion alone.

Question 13

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

If the client withholds information about an existing lawsuit, the auditor may need to estimate the potential liability and disclose it in the financial statements. This information is important for users of the financial statements, as it can affect their decisions about investing or lending to the company. The misstatement does not necessarily have a direct impact on net income, the auditor's exposure to lawsuits, or management's future decisions.

Question 14

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 financial statement accounts, including cost of goods sold and current assets. It is therefore considered more pervasive than the other misstatements listed. The misstatement in option B only affects retained earnings, the misstatement in option C only affects the classification of one liability account, and the misstatement in option D only affects the classification of one expense account.

Question 15

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 (net income, total assets, and working capital) are commonly accepted measurement bases for comparing misstatements and making a decision about materiality. The choice of which base(s) to use will depend on the specific circumstances of the entity and the nature of the financial statement item being analyzed.

Question 16

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 state that their opinion is qualified "except for" the specific issue or issues that caused them to qualify their opinion. This is required by auditing standards to provide clarity to the users of the financial statements.

Question 17

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 18

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 three factors- dollar amount in comparison to a base, measurability of the misstatement, and the nature of the item- are important considerations that an auditor should factor in when determining materiality.

Question 19

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 20

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.

Quiz 3: Audit Reports

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

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

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

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

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:

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

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.

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

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.

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

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 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:

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) :

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

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

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.

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?

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.

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: