Question 1

Green,CPA,was engaged to audit the financial statements of Essex Co.after its fiscal year had ended.The timing of Green's appointment and the start of field work made confirmation of accounts receivable by direct communication with the customers not feasible.However,Green applied other procedures and was satisfied as to the reasonableness of the account balances.Green's auditors' report most likely contained a(n)

Accepted Answer

The question states that Green was unable to directly confirm accounts receivable, but was still satisfied with the reasonableness of the balances through other procedures. This does not qualify as a scope limitation or departure from generally accepted auditing standards, and thus an unmodified opinion would be appropriate.

Question 2

Which of the following phrases would auditors most likely include in their report when expressing a qualified opinion on the entity's financial statements because of inadequate disclosure?

Accepted Answer

A qualified opinion is issued when there is a limitation or exception to the financial statements, such as inadequate disclosure. The phrase "Except for the omission of the information discussed in the preceding paragraph" is typically used to indicate the specific issue leading to the qualified opinion.

Question 3

When audited financial statements are presented in a document containing other information,the auditors should

Accepted Answer

Auditors are required to read the other information to ensure it is consistent with the audited financial statements, but they are not required to perform procedures to verify the other information.

Question 4

When there has been a change in accounting principles,but the effect of the change on the comparability of the financial statements is not material,the auditors should

Accepted Answer

If the change in accounting principles has no material effect on the comparability of the financial statements, the auditors are not required to refer to consistency in the report. Therefore, the best choice is option C, which states that the auditors should not refer to consistency in the report. Options A and D are incorrect because referring to the change in an emphasis-of-matter paragraph or opinion paragraph would be misleading since the change does not materially affect comparability. Option B is also incorrect because the auditors should not express a preference for one accounting principle over another unless it is clearly required by GAAP.

Question 5

Reference in a group auditors' report to the fact that part of the audit of group financial statements was performed by component auditors most likely would be an indication of

Accepted Answer

A reference in a group auditors' report to the fact that part of the audit of group financial statements was performed by component auditors indicates the involvement of component auditors in the audit of the group financial statements. This would typically occur when the group auditors engage other auditors to perform work on subsidiaries or divisions that are material to the group financial statements. The group auditors are responsible for reviewing and evaluating the work of the component auditors as part of their overall audit opinion on the group financial statements.

Question 6

When disclaiming an opinion due to a client-imposed scope limitation,auditors should describe the nature of the scope limitation in an additional paragraph and modify the

Accepted Answer

When there is a client-imposed scope limitation that affects the auditor's ability to express an opinion, the auditor should add an explanatory paragraph in the introductory paragraph, modify the Auditor's Responsibility section to describe the nature of the limitation, and modify the opinion paragraph to disclaim an opinion. This provides a clear and complete understanding of the limitations on the audit and the resulting disclaimed opinion. Therefore, option C is the best choice.

Question 7

If management fails to provide adequate justification for a change from one generally accepted accounting principle to another,the auditors should

Accepted Answer

If management fails to provide adequate justification for a change from one generally accepted accounting principle to another, the auditors should add an additional paragraph and express a qualified or an adverse opinion on the entity's financial statements for lack of conformity with generally accepted accounting principles. This is because the financial statements must conform to generally accepted accounting principles to ensure its relevance and comparability. Failure to justify a change in accounting principles implies a lack of conformity with the expected standards, which needs to be disclosed by the auditors.

Question 8

In which of the following circumstances would auditors most likely add an emphasis-of-matter paragraph to the standard (unmodified)report without modifying the opinion on the entity's financial statements?

Accepted Answer

An emphasis-of-matter paragraph would be added if the auditors have substantial doubt about the entity's ability to continue as a going concern. This paragraph would draw attention to the uncertainty related to the entity's ability to continue, but it would not modify the overall opinion on the financial statements. The other options do not relate to circumstances where an emphasis-of-matter paragraph would be required.

Question 9

Which of the following is an example of a material accounting change that requires recognition in an unmodified opinion on the entity's financial statements?

Accepted Answer

The answer of Which of the following is an example...

Question 10

In which of the following situations would auditors ordinarily choose between expressing a qualified opinion or an adverse opinion on the entity's financial statements?

Accepted Answer

The answer of In which of the following situations would...

Question 11

The auditors include an emphasis-of-matter paragraph in an otherwise unmodified report on the entity's financial statements to emphasize that the entity being reported on had significant transactions with related parties.The inclusion of this separate paragraph

Accepted Answer

The inclusion of an emphasis-of-matter paragraph in an otherwise unmodified report on the entity's financial statements to emphasize that the entity being reported on had significant transactions with related parties is appropriate and would not otherwise affect the unmodified opinion. This paragraph is not considered to be a qualification of the opinion and does not violate generally accepted auditing standards as it provides additional information to the users of the financial statements. There is no need to revise the opinion paragraph to include the phrase "with the foregoing explanation."

Question 12

Under which of the following circumstances would a disclaimer of opinion on the entity's financial statements not be appropriate?

Accepted Answer

A disclaimer of opinion is not appropriate when the financial statements fail to contain adequate disclosure of related-party transactions because the auditor can issue a qualified opinion or an adverse opinion depending on the materiality and pervasiveness of the lack of disclosure. Disclaimers are typically issued when the auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, which is more aligned with scenarios B, C, and D.

Question 13

When financial statements contain a departure from GAAP,the auditors should explain the unusual circumstances in a separate paragraph and express an opinion that is

Accepted Answer

When financial statements contain a departure from GAAP, the auditor should explain the unusual circumstances in a separate paragraph and express an opinion that is qualified or adverse, depending on the overall materiality and pervasiveness of the GAAP departure. Therefore, option D is the best choice.

Question 14

Auditors who are reporting on financial statements that contain a material departure from generally accepted accounting principles should include an additional paragraph and

Accepted Answer

When financial statements contain a material departure from GAAP, auditors should express a qualified or adverse opinion, depending on the severity of the departure.

Question 15

In which of the following circumstances would auditors be most likely to express an adverse opinion?

Accepted Answer

An adverse opinion is issued when the auditors determine that the financial statements are materially misstated and not in accordance with generally accepted accounting principles. In this case, the financial statements are not in compliance with GAAP regarding the capitalization of leases, which is a material misstatement. The other options may result in a qualified or disclaimer of opinion, but not an adverse opinion.

Question 16

Auditors would not normally issue a qualified opinion on the entity's financial statements when

Accepted Answer

The lack of independence of the auditors with respect to the audited entity is a fundamental issue that would result in a disclaimer of opinion rather than a qualified opinion. Qualified opinions are issued when the auditors have concerns about specific items in the financial statements or when a scope limitation prevents them from obtaining sufficient evidence. The use of an accounting principle at variance with generally accepted accounting principles, or a change in accounting principle with which the auditor disagrees, may result in a qualified opinion if the impact on the financial statements is material and pervasive. However, the specific circumstances would need to be evaluated in each case.

Question 17

Independent auditors must consider whether the entity has the ability to continue as a going concern.If a substantial doubt exists but disclosure is adequate and no other basis exists for modifying the report,the auditors would normally

Accepted Answer

If there is a substantial doubt about an entity's ability to continue as a going concern but the auditors find no other basis for modification of the opinion, they would express an unmodified opinion with an emphasis-of-matter paragraph describing the uncertainty. This would draw readers' attention to the going concern issue while still providing a clean opinion on the entity's financial statements. Disclaiming or expressing an adverse opinion would be appropriate only if the going concern issue was so severe that it affected the overall fairness of the financial statements. Qualifying the opinion might also be appropriate in some cases, but an emphasis-of-matter paragraph would provide a clearer delineation of the going concern issue.

Question 18

Auditors most likely would issue a disclaimer of opinion on the entity's financial statements because of

Accepted Answer

A disclaimer of opinion is issued when auditors are unable to obtain sufficient appropriate audit evidence, such as when management refuses to provide necessary written representations.

Question 19

The auditors conclude that an entity's illegal act,which has a material effect on the financial statements,has not been properly accounted for or disclosed.Depending on the overall materiality and pervasiveness of the effect of this illegal act on the financial statements,the auditors should express either a(n)

Accepted Answer

If an illegal act has a material effect on the financial statements and is not properly accounted for or disclosed, auditors should express a qualified opinion if the effect is material but not pervasive, or an adverse opinion if the effect is both material and pervasive.

Question 20

Charlie Company's comparative financial statements include the financial statements of the prior year that were audited by predecessor auditors whose report on those financial statements is not presented.If the predecessor's report was qualified,the successor auditors should

Accepted Answer

If the predecessor auditor's report was qualified, the successor auditor should indicate in their report the substantive reasons for the qualification issued by the predecessor auditor. This is required by auditing standards to provide users of the financial statements with relevant information about the prior year's financial statements. Simply expressing an opinion only on the current year's financial statements or issuing an updated comparative report are not appropriate responses, and requesting the entity to reissue the predecessor's report is not the responsibility of the successor auditor.

Quiz 12: Reports on Audited Financial Statements