Question 1

Which of the following is least likely to result in qualification of the auditors' opinion due to a scope limitation?
A)Scope limitations imposed by the client.
B)Reliance placed upon the report of component auditors.
C)Inability to obtain sufficient appropriate audit evidence.
D)Inadequate accounting records.

Accepted Answer

Reliance on the report of component auditors is a common practice and does not typically result in a qualification of the auditor's opinion due to a scope limitation, as long as the principal auditor is satisfied with the component auditor's work.

Question 2

Which of the following will result in emphasis-of-matter as to consistency in the auditor's report,regardless of whether the item is fully disclosed in the financial statements?
A)A change in accounting estimate.
B)A change from an unacceptable accounting principle to a generally accepted one.
C)Correction of an error not involving a change in accounting principle.
D)A change in classification.

Accepted Answer

A change from an unacceptable accounting principle to a generally accepted one will result in emphasis-of-matter as to consistency in the auditor's report, regardless of whether the item is fully disclosed in the financial statements. This is because such a change essentially requires a restatement of prior period financial statements to ensure consistency, and failure to do so may materially misstate the current period financial statements.

Question 3

An independent auditor has concluded that substantial doubt remains about a client's ability to continue as a going concern,but the client's financial statements have properly disclosed all of its solvency problems.The auditor would probably issue a(an):
A)Unmodified opinion with an appropriate emphasis-of-matter paragraph.
B)"Except for" qualified opinion.
C)Standard unmodified opinion.
D)Adverse opinion.

Accepted Answer

The independent auditor would issue an unmodified opinion with an appropriate emphasis-of-matter paragraph. This is because even though there is substantial doubt about the client's ability to continue as a going concern, they have properly disclosed all of their solvency problems in their financial statements, which satisfies the auditor's responsibility to ensure accurate disclosure. The emphasis-of-matter paragraph would draw attention to the going concern issue.

Question 4

Under which of the following set of circumstances might the auditors disclaim an opinion?
A)The financial statements contain a departure from generally accepted accounting principles, the effect of which is material.
B)The group auditors decide to make reference to the report of component auditor who audited a subsidiary.
C)There has been a material change between periods in the method of application of accounting principles.
D)There are significant scope limitations on the audit.

Accepted Answer

When there are significant scope limitations on the audit, which means that the auditor was not able to obtain sufficient and appropriate audit evidence, the auditors may disclaim an opinion. This is because they are not able to form an opinion on the financial statements as a whole. The other options may result in qualified opinions or other types of modified opinions, but not a disclaimer.

Question 5

A basis for modification paragraph is ordinarily placed:
A)Within the "Auditor's Responsibility" section of the audit report.
B)Preceding the opinion section.
C)After the opinion section.
D)Based on the auditor's judgment either before or after the opinion section.

Accepted Answer

The answer of A basis for modification paragraph is ordinarily...

Question 6

For a particular entity's financial statements to be presented fairly in conformity with generally accepted accounting principles,it is not required that the principles selected:
A)Be appropriate in the circumstances for the particular entity.
B)Reflect transactions in a manner that presents the financial statements within a range of acceptable limits.
C)Present information in the financial statements that is classified and summarized in a reasonable manner.
D)Be applied on a basis consistent with those followed in the prior year.

Accepted Answer

While consistency in the application of accounting principles is preferred, it is not a requirement for financial statements to be presented fairly in accordance with GAAP. The other three choices, A, B, and C are essential components for financial statements to be presented fairly in accordance with GAAP.

Question 7

Morgan,CPA,is the group auditor for a multinational corporation.Another CPA has examined and reported on the financial statements of a significant subsidiary of the corporation.Morgan is satisfied with the independence and professional reputation of the component auditor,as well as the quality of the component auditor's audit.With respect to Morgan's report on the consolidated financial statements,taken as a whole,Morgan:
A)Must not refer to the audit of the component auditor.
B)Must refer to the audit of the component auditor.
C)May refer to the audit of the component auditor.
D)May refer to the audit of the component auditor, in which case Morgan must include in the audit report on the consolidated financial statements a qualified opinion with respect to the audit of the component auditor.

Accepted Answer

According to International Standards on Auditing (ISA) 600, when the group auditor is satisfied as to the independence and professional reputation of the component auditor, as well as the quality of the work performed, the group auditor may refer to the work of the component auditor in the group auditor's report on the consolidated financial statements. However, the group auditor is not required to do so. The best option is to refer to the work of the component auditor, but it is not mandatory. There is no need for a qualified opinion in this case.

Question 8

Which of the following is a general purpose financial reporting framework?
A)Generally accepted auditing standards.
B)Auditing Standards of the Public Company Accounting Oversight Board.
C)International Standards of Auditing.
D)International Financial Reporting Standards

Accepted Answer

International Financial Reporting Standards (IFRS) is a global accounting framework that provides general purpose financial reporting guidance for a wide range of entities in various industries and sectors. It is used in over 140 countries, including many of the world's major economies. The other options listed are not financial reporting frameworks, but rather auditing standards.

Question 9

For a continuing audit client,when a complete set of financial statements is presented on a comparative basis for two years,the auditors' opinion would refer to:
A)Only the current year under audit.
B)Either one or both years at the option of the auditors.
C)Each of the two years plus the preceding year.
D)Each of the years in the two-year period.

Accepted Answer

The auditors' opinion would refer to each of the years in the two-year period since a complete set of financial statements is presented on a comparative basis for two years. The auditors need to express their opinion on both the years presented in the financial statements.

Question 10

When reporting on comparative financial statements where the financial statements of the prior period have been examined by a predecessor auditor whose report is not presented,the successor auditor should indicate in the report:
A)The reasons why the predecessor auditor's report is not presented.
B)The identity of the predecessor auditor who examined the financial statements of the prior year.
C)Whether the predecessor auditor's review of the current year's financial statements revealed any matter that might have a material effect on the successor auditor's opinion.
D)The type of opinion expressed by the predecessor auditor.

Accepted Answer

The successor auditor should indicate the type of opinion expressed by the predecessor auditor when the predecessor's report is not presented. This provides context and continuity for the financial statement users regarding the audit opinions over time.

Question 11

Which of the following representations does an auditor make explicitly and which implicitly when issuing an unmodified (unqualified)opinion on public company financial statements? $\begin{array} {c} 
&\text{Conformity with} & \text{Adequacy} \
&\text{PCAOB Standards} & \text{of disclosure}\
\text { A) } & \text { Explicitly } & \text { Explicitly } \ \text { B) } & \text { Implicitly } & \text { Implicitly } \ \text { C) } & \text { Implicitly } & \text { Explicitly } \ \text { D) } & \text { Explicitly } & \text { Implicitly } \end{array}$
A)Option A
B)Option B
C)Option C
D)Option D

Accepted Answer

An auditor explicitly states that the audit was conducted in accordance with PCAOB standards, while the adequacy of disclosure is implied by the issuance of an unmodified opinion.

Question 12

An auditor has been asked to report on the balance sheet of Kane Company but not on the other basic financial statements.The auditor will have access to all information underlying the basic financial statements.Under these circumstances,the auditor:
A)May accept the engagement.
B)May accept the engagement but must disclaim an opinion because of an inability to apply the procedures considered necessary.
C)Should refuse the engagement because there is a client-imposed scope limitation.
D)Should refuse the engagement because of a departure from generally accepted auditing standards.

Accepted Answer

Auditors can accept engagements to report on a single financial statement, such as the balance sheet, as long as they have access to all necessary information. This does not constitute a scope limitation or a departure from generally accepted auditing standards, allowing the auditor to perform the engagement and provide an appropriate opinion.

Question 13

When the auditor is unable to determine the amounts associated with noncompliance with a law by client personnel due to a scope limitation,the auditor should issue a(an):
A)Standard unmodified opinion.
B)Disclaimer of opinion.
C)Adverse opinion.
D)Unmodified opinion with a separate emphasis-of-matter paragraph.

Accepted Answer

A disclaimer of opinion is appropriate when the auditor is unable to obtain sufficient evidence due to a scope limitation. In this case, the inability to determine the amounts associated with noncompliance with a law by client personnel is a scope limitation that prevents the auditor from forming an opinion on the financial statements as a whole, and thus a disclaimer of opinion is the best choice.

Question 14

If an accounting change has no material effect on the financial statements in the current year,but the change is reasonably certain to have a material effect in later years,the change should be:
A)Referred to in the auditor's report for the current year.
B)Disclosed in the notes to the financial statements of the current year.
C)Disclosed in the notes to the financial statements and referred to in the auditor's report for the current year.
D)Treated as a subsequent event.

Accepted Answer

If an accounting change has no material effect on the financial statements in the current year but is reasonably certain to have a material effect in later years, then it should be disclosed in the notes to the financial statements of the current year. This is because the change does not have a material effect in the current year, so it does not need to be referred to in the auditor's report. It is important, however, to disclose the change in the notes to the financial statements, so that investors and other stakeholders are aware of the change and its potential impact in future years.

Question 15

When financial statements of a prior period are presented on a comparative basis with financial statements of the current period,the continuing auditor is responsible for:
A)Expressing dual dated opinions.
B)Updating the report on the previous financial statements only if there has not been a change in the opinion.
C)Updating the report on the previous financial statements only if the previous report was qualified and the reasons for the qualification no longer exist.
D)Updating the report on the previous financial statements regardless of the opinion previously issued.

Accepted Answer

When financial statements of a prior period are presented on a comparative basis with financial statements of the current period, the continuing auditor is responsible for updating the report on the previous financial statements regardless of the opinion previously issued. This ensures that the auditor's opinion reflects any new information or changes that may have occurred since the original report was issued.

Question 16

Doe,an independent auditor,was engaged to perform an audit of the financial statements of Ally Incorporated one month after its fiscal year had ended.Although the inventory count was not observed by Doe,and accounts receivable were not confirmed by direct communication with debtors,Doe was able to obtain sufficient appropriate audit evidence by applying alternative auditing procedures.Doe's audit report will probably contain:
A)A standard unmodified opinion.
B)An unmodified opinion and an emphasis-of-matter paragraph.
C)Either a qualified opinion or a disclaimer of opinion.
D)An "except for" qualification.

Accepted Answer

Although the inventory count was not observed and accounts receivable were not confirmed, Doe was able to obtain sufficient appropriate audit evidence by applying alternative auditing procedures. Therefore, there is no significant limitation to the scope of the audit, and an unmodified opinion can be given.

Question 17

In which of the following circumstances will it be most likely that an adverse opinion is considered appropriate?
A)The auditor is not independent with respect to the enterprise being audited.
B)The statements are not in conformity with generally accepted accounting principles due to a departure from GAAP with an immaterial effect on the financial statements.
C)The statements are not in conformity with generally accepted accounting principles regarding pension plans.
D)A client-imposed scope limitation prevents the auditor from obtaining sufficient appropriate audit evidence.

Accepted Answer

If the financial statements are not in conformity with GAAP regarding a significant area such as pension plans, an adverse opinion is considered appropriate because the financial statements are materially misstated. Factors such as lack of auditor independence or scope limitation may also lead to an adverse opinion, but they are not as likely as a departure from a significant area of GAAP. A departure from GAAP with an immaterial effect on the financial statements would result in a qualified or unmodified opinion, not an adverse opinion.

Question 18

The auditors include an emphasis-of-matter paragraph in report with an unmodified opinion in order to emphasize that the entity being reported upon is a subsidiary of another business enterprise.The inclusion of this paragraph:
A)Is appropriate and would not negate the unmodified opinion.
B)Is considered a qualification of the opinion.
C)Is a violation of generally accepted reporting standards if this information is disclosed in notes to the financial statements.
D)Necessitates a revision of the opinion paragraph to include the phrase "with the foregoing explanation."

Accepted Answer

The inclusion of an emphasis-of-matter paragraph is appropriate and does not negate the unmodified opinion. This type of paragraph is used to draw the reader's attention to a matter that is considered significant, but not to the extent of requiring a qualified or adverse opinion. It is not considered a qualification of the opinion and does not require a revision of the opinion paragraph. Disclosing this information in the notes to the financial statements would also not violate generally accepted reporting standards.

Question 19

An auditor's report on comparative financial statements should be dated as of the date of the:
A)Issuance of the report.
B)Accumulation of sufficient appropriate audit evidence.
C)Latest financial statements being reported on.
D)Last related-party transaction disclosed in the statements.

Accepted Answer

The auditor's report should be dated as of the date when the auditor has accumulated sufficient appropriate audit evidence to support the opinion on the financial statements. This date signifies the end of the auditor's responsibility for the review of events that may affect the financial statements.

Question 20

An emphasis-of-matter paragraph ordinarily
A)Relates to a report with a modified opinion.
B)Follows the opinion paragraph.
C)May either precede or follow the opinion paragraph.
D)Is only included in an audit report with an adverse opinion.

Accepted Answer

The answer of An emphasis-of-matter paragraph ordinarily
A)Relates to a report...

Quiz 17: Auditors Report

Which of the following is least likely to result in qualification of the auditors' opinion due to a scope limitation?

Which of the following will result in emphasis-of-matter as to consistency in the auditor's report,regardless of whether the item is fully disclosed in the financial statements?

An independent auditor has concluded that substantial doubt remains about a client's ability to continue as a going concern,but the client's financial statements have properly disclosed all of its solvency problems.The auditor would probably issue a(an) :

Under which of the following set of circumstances might the auditors disclaim an opinion?

A basis for modification paragraph is ordinarily placed:

For a particular entity's financial statements to be presented fairly in conformity with generally accepted accounting principles,it is not required that the principles selected:

Which of the following is a general purpose financial reporting framework?

For a continuing audit client,when a complete set of financial statements is presented on a comparative basis for two years,the auditors' opinion would refer to:

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

An auditor has been asked to report on the balance sheet of Kane Company but not on the other basic financial statements.The auditor will have access to all information underlying the basic financial statements.Under these circumstances,the auditor:

When the auditor is unable to determine the amounts associated with noncompliance with a law by client personnel due to a scope limitation,the auditor should issue a(an) :

If an accounting change has no material effect on the financial statements in the current year,but the change is reasonably certain to have a material effect in later years,the change should be:

When financial statements of a prior period are presented on a comparative basis with financial statements of the current period,the continuing auditor is responsible for:

In which of the following circumstances will it be most likely that an adverse opinion is considered appropriate?

The auditors include an emphasis-of-matter paragraph in report with an unmodified opinion in order to emphasize that the entity being reported upon is a subsidiary of another business enterprise.The inclusion of this paragraph:

An auditor's report on comparative financial statements should be dated as of the date of the:

An emphasis-of-matter paragraph ordinarily