Question 1

R.Wolfe became the new auditor for Royal Corporation,succeeding C. Mason, who audited the financial statements last year. Wolfe needs to report on Royal's comparative financial statements and should disclose in the report an explanation about other auditors having audited the prior year

Accepted Answer

Wolfe should describe the prior audit and the opinion but not name Mason as the predecessor auditor to maintain confidentiality and focus on the audit process rather than the individual auditor.

Question 2

How is the auditors' own responsibility for expressing the opinion on financial statements disclosed in the report?

Accepted Answer

The auditors' own responsibility for expressing the opinion on financial statements is stated explicitly in the introductory paragraph of the standard report.

Question 3

Auditors found that the entity has not capitalized a material amount of leases in the financial statements.When considering the overall materiality of this departure from GAAP,the auditors would choose which reporting options?

Accepted Answer

The material departure from GAAP regarding the non-capitalization of leases would result in a restriction on the scope of the audit and a potential material misstatement in the financial statements. Therefore, the auditors would have to issue either a qualified opinion or an adverse opinion. An unqualified opinion or a disclaimer of opinion would not be appropriate as the departure from GAAP is considered material. An explanatory paragraph with an unqualified opinion would not be sufficient as the departure from GAAP is material to the financial statements.

Question 4

Which of the following is not included in the scope paragraph of the standard report on the entity's financial statements?

Accepted Answer

The conclusion that the financial statements are in conformity with U.S. GAAP is included in the opinion paragraph, not the scope paragraph.

Question 5

When auditors render an adverse opinion on the entity's financial statements,the

Accepted Answer

In an adverse opinion, the introductory and scope paragraphs remain standard, but the opinion paragraph is modified to explain the reasons for the adverse opinion.

Question 6

When other independent auditors are involved in the current audit of parts of the entity's business,the group auditors may issue a report that

Accepted Answer

When other independent auditors are involved in the current audit of parts of the entity's business, the group auditors may issue a report that mentions the component auditors, describes the extent of the component auditors' work, and expresses an unqualified opinion. This approach ensures that the users of the financial statements are aware of the involvement of component auditors and the scope of their work, and that the group auditors take responsibility for the overall opinion.

Question 7

Under which of the following conditions can a disclaimer of opinion never be issued?

Accepted Answer

The answer of Under which of the following conditions can...

Question 8

Which of the following is not included in the introductory paragraph of the standard report on the entity's financial statements?

Accepted Answer

The introductory paragraph of the standard audit report typically includes the names of the financial statements audited, the auditors' responsibility, and management's responsibility. The fact that an audit provides a reasonable basis for an opinion is usually mentioned in the scope paragraph, not the introductory paragraph.

Question 9

An entity accomplished an early extinguishment of debt and the auditors believe that literal application of GAAP would cause recognition of a loss that would materially distort the financial statements and cause them to be misleading.Given these facts,the auditors would probably choose which reporting option?

Accepted Answer

The auditors would explain the situation and issue an unqualified opinion, relying on Rule 203 of the AICPA Code of Professional Conduct. Rule 203 allows auditors to depart from literal application of GAAP if they believe that it would cause the financial statements to be misleading. However, the auditors must disclose the departure from GAAP and explain the reasons for it in the audit report, which would result in an unqualified opinion with an explanatory paragraph.

Question 10

If the auditors decide to present separate reports on the entity's financial statements and internal control over financial reporting,which of the following reports should be modified to refer to the other report?

Accepted Answer

If the auditors decide to present separate reports on the entity's financial statements and internal control over financial reporting, the report on the entity's financial statements should be modified to refer to the report on internal control over financial reporting (Option A). This is because the report on internal control over financial reporting provides information on the adequacy of the entity's internal control to support the preparation of reliable financial statements. Therefore, it is important to cross-reference the report on financial statements with the report on internal control over financial reporting. Options B, C, and D are not relevant in this context.

Question 11

When reporting on comparative financial statements,auditors ordinarily should modify their previously expressed opinion on the prior-year financial statements if the

Accepted Answer

If prior-year financial statements are restated to conform with GAAP, auditors should modify their previously expressed opinion to reflect the restatement.

Question 12

Which of the following is not included in the standard report on the financial statements?

Accepted Answer

While auditors may include some additional information in their report, including an explanatory paragraph commenting on the effect of economic conditions on the entity is not a standard requirement in the report on financial statements. A, B, and C are all standard elements of the report.

Question 13

How would the auditors' opinion on the entity's financial statements be affected if a material weakness in internal control over financial reporting is identified?

Accepted Answer

A material weakness in internal control over financial reporting does not automatically affect the auditors' opinion on the financial statements if they can still obtain sufficient appropriate evidence to conclude that the financial statements are free of material misstatement.

Question 14

The auditors determined that the entity is suffering financial difficulty and the going-concern status is seriously in doubt.Assuming the entity adequately disclosed this matter in the financial statements,the auditors must choose between which of the following auditors' report alternatives?

Accepted Answer

If the entity has adequately disclosed the financial difficulty and going-concern status, the auditors may issue an unqualified opinion but add an explanatory paragraph explaining the going-concern situation. This is allowed under the US Generally Accepted Accounting Principles (US GAAP). However, if the auditors believe that the disclosure is inadequate or if they are uncertain about the entity's ability to continue as a going concern, a disclaimer of opinion may be appropriate. Therefore, choice A is the best answer.

Question 15

Which of the following would cause the auditors to issue a report on the entity's financial statements other than a standard report?

Accepted Answer

The omission of a necessary footnote would result in a qualification or an adverse opinion in the auditor's report, rather than a standard unqualified opinion. The other options do not indicate any issues that would lead to a non-standard report.

Question 16

When auditors wish to issue an unqualified opinion but highlight that the entity changed its method of accounting for software development costs,what type of report modification would be most appropriate?

Accepted Answer

A change in accounting method is considered a material event that may need to be highlighted in the auditor's report. Emphasis-of-matter paragraphs are used to highlight matters that are material to the financial statements but are not related to the auditor's opinion. Therefore, by identifying the change in accounting method in an emphasis-of-matter paragraph, the auditor can provide additional information to users of the financial statements without affecting the unqualified opinion.

Question 17

If the auditors obtain sufficient appropriate evidence on the entity's accounts receivable balance by using alternative procedures because it is impracticable to confirm accounts receivable,the opinion on the entity's financial statements should be unqualified and would

Accepted Answer

If auditors obtain sufficient appropriate evidence using alternative procedures, there is no need to disclose the fact that alternative procedures were used or explain the performance of alternative procedures in the opinion paragraph. The unqualified opinion should not be modified in any way. Therefore, the best choice is option C, which does not mention the alternative procedures.

Question 18

When reporting under GAAS,certain statements are required in all auditors' reports ("explicit")and others are required only under certain conditions ("implicit").Which combination that follows correctly describes the auditors' responsibilities for reporting?

Accepted Answer

The answer of When reporting under GAAS,certain statements are required...

Question 19

In a standard report,which of the following paragraphs indicates that auditors conducted their audits in accordance with standards of the PCAOB?

Accepted Answer

The scope paragraph typically includes a statement indicating that the audit was conducted in accordance with standards of the PCAOB or other relevant auditing standards. This paragraph outlines the specific procedures performed by the auditor and the scope of the audit work.

Question 20

Which of these situations would require auditors to append an explanatory paragraph about consistency to an otherwise unqualified opinion?

Accepted Answer

A change in inventory costing method from FIFO to LIFO would require auditors to append an explanatory paragraph about consistency to an otherwise unqualified opinion.

Quiz 12: Reports on Audited Financial Statements