Question 1

In connection with the examination of the consolidated financial statements of Mott Industries,Frazier,CPA,plans to refer to another CPA's examination of the financial statements of a subsidiary company.Under these circumstances,Frazier's report must disclose

Accepted Answer

When a principal auditor decides to make reference to another auditor's work in their report, it is necessary to disclose the portion of the financial statements that was examined by the other auditor. This helps users of the financial statements understand the division of responsibility between the auditors involved.

Question 2

The choice of which audit report to issue depends on the condition and the materiality of any departure.

Accepted Answer

The choice of which audit report to issue depends on various factors including any departures from the auditor's opinion, the materiality of the departures, and the overall condition of the financial statements. Therefore, the statement is true.

Question 3

A predecessor auditor should complete the following before reissuing a report on statements presented on a comparative basis:

Accepted Answer

The predecessor auditor should read the financial statements of the current period to ensure that there are no material changes that would affect the comparability of the financial statements. Additionally, obtaining a letter of representation from the current-year, successor auditor would provide assurance that there are no significant issues or concerns with the financial statements that would impact the comparability of the financial statements. Reading the financial statements of the past five years (choice B) is not necessary and would be time-consuming and cost-prohibitive.

Question 4

When comparative financial statements are presented,the fourth standard of reporting,which refers to financial statements "taken as a whole," should be considered to apply to the financial statements of the

Accepted Answer

The fourth standard of reporting, which refers to financial statements "taken as a whole," applies not only to the current period but also to the other periods presented in the comparative financial statements. Therefore, the best choice is C, current period and those of the other periods presented.

Question 5

Changes that do not affect consistency are normally disclosed in the footnotes but do not require an explanatory/emphasis-of-matter paragraph in the audit report.

Accepted Answer

Changes that do not affect consistency are considered immaterial and can be disclosed in the footnotes without the need for an explanatory/emphasis-of-matter paragraph in the audit report.

Question 6

An opinion based in part on the report of another auditor requires an explanatory/emphasis-of-matter paragraph be added to the standard unqualified audit report.

Accepted Answer

An opinion based in part on the report of another auditor does not automatically require an explanatory/emphasis-of-matter paragraph in the standard unqualified audit report. Instead, reference to the work of the other auditor may be made in the auditor's responsibility section, without necessitating an emphasis-of-matter paragraph.

Question 7

A scope limitation results from an inability to obtain sufficient appropriate evidence about some component of the financial statements.

Accepted Answer

A scope limitation occurs when auditors are unable to gather enough evidence to form an opinion on a particular component of the financial statements. This can result from factors such as restricted access to information, time constraints, or limitations in the auditing procedures used. The auditor must disclose any scope limitations in their report and qualify their opinion accordingly.

Question 8

A change in reporting entity is an example of an accounting change that affects comparability and requires an explanatory/emphasis-of-matter paragraph in the audit report.

Accepted Answer

A change in reporting entity, such as a company changing its legal structure or reporting segment, can significantly impact the comparability of financial statements between years. As a result, the audit report will typically include an explanatory or emphasis-of-matter paragraph to disclose and explain the change to users of the financial statements.

Question 9

An auditor may be unable to express an unqualified opinion if an immaterial departure from GAAP is present in the financial statements.

Accepted Answer

An auditor may still be able to express an unqualified opinion if an immaterial departure from GAAP is present in the financial statements. However, the auditor must disclose the departure in the footnotes to the financial statements.

Question 10

If the principal auditor decides to make reference to the other auditor's examination,the introductory paragraph must specifically indicate the

Accepted Answer

The introductory paragraph must indicate the portion of the financial statements examined by the other auditor to clarify the division of responsibility.

Question 11

Which of the following parties is responsible for the fairness of the representations made in financial statements?

Accepted Answer

Entity's management is ultimately responsible for the fairness of the representations made in financial statements. While the independent auditor provides assurance on the financial statements, they do not have primary responsibility for their content. The audit committee is responsible for overseeing the financial reporting process, but they are not responsible for the fairness of the representations themselves. The AICPA is a professional organization for CPAs and does not have a direct role in ensuring the fairness of specific financial statements.

Question 12

Management believes and the auditor is satisfied,that a material loss probably will occur when pending litigation is resolved.Management is unable to make a reasonable estimate of the amount or range of the potential loss,but fully discloses the situation in the notes to the financial statements.If the auditor wishes to call attention to the matter and management does not make an accrual in the financial statements,the auditor should issue a(an)

Accepted Answer

If management discloses the situation in the notes to the financial statements, but is unable to make a reasonable estimate of the potential loss, the auditor should issue an unqualified report with an explanatory or emphasis-of-matter paragraph drawing attention to the disclosure in the notes. If the auditor believes that the lack of accrual is a departure from GAAP, a qualified report may be necessary. However, in this case, since there is no departure from GAAP, a qualified report is not appropriate. A scope limitation would only be applicable if the auditor was unable to obtain sufficient evidence to support a material account balance or disclosure, which is not the case here. Therefore, the best choice is C.

Question 13

A change in accounting estimate is an example of an accounting change that affects comparability and requires an explanatory/emphasis-of-matter paragraph in the audit report.

Accepted Answer

A change in accounting estimate does not require an explanatory/emphasis-of-matter paragraph in the audit report, as it is considered a normal part of business operations and does not affect the comparability of financial statements in the same way as a change in accounting principle would.

Question 14

A basic assumption that underlies financial reporting is that an entity will continue as a going concern.

Accepted Answer

The going concern assumption is a fundamental concept of accounting and financial reporting, stating that unless there is significant evidence to the contrary, an entity is assumed to continue to operate indefinitely into the future. This assumption affects financial statement preparation, as it requires that assets and liabilities be valued and presented as if the entity will continue to operate as a going concern.

Question 15

For which of the following events would an auditor issue a report that does not include any reference to consistency?

Accepted Answer

Consistency refers to the use of the same accounting principles and methods from one period to another, and the auditor is required to evaluate whether the consistency principle has been followed in their audit. However, a change in the estimate of the service life used to calculate the depreciation expense does not affect the consistency of the financial statements since it is an estimate that can be revised based on new information or changes in circumstances. Therefore, the auditor would not need to issue a report that references consistency in this scenario. Choices A, B, and D involve significant changes in accounting principles that would require disclosure and evaluation of consistency in the auditor's report.

Question 16

Which of the following situations will not result in modification of the auditor's report because of a scope limitation?

Accepted Answer

Reliance placed on the report of another auditor does not result in a scope limitation for the auditor conducting the current audit. The other auditor's report serves as sufficient appropriate evidence, thus there is no scope limitation. The other choices can result in a scope limitation for the auditor, necessitating modification of the auditor's report.

Question 17

An auditor must disclaim an opinion when the auditor lacks independence.

Accepted Answer

According to auditing standards, an auditor must be independent to provide an unbiased opinion on the financial statements. If the auditor lacks independence, then they cannot provide an opinion and must disclaim it.

Question 18

When the audited financial statements of the prior year are presented together with those of the current year,the continuing auditor's report should cover

Accepted Answer

When the audited financial statements of the prior year are presented together with those of the current year, the continuing auditor's responsibility extends to both sets of financial statements, hence the auditor's report should cover both years. This ensures that users of the financial statements receive a comprehensive view of the financial performance and position over the two-year period, with the auditor's opinion applying to both.

Question 19

A going concern issue requires a modification of the three-paragraph standard unqualified audit report (public company).

Accepted Answer

A going concern issue requires the auditor to add an explanatory paragraph to the standard unqualified audit report.

Question 20

If the auditor believes that there is minimal likelihood that resolution of an uncertainty will have a material effect on the financial statements,the auditor would issue a(n)

Accepted Answer

If the auditor believes that there is minimal likelihood that resolution of an uncertainty will have a material effect on the financial statements, then the auditor would issue an unqualified opinion. This opinion indicates that the financial statements present fairly, in all material respects, the financial position, results of operations, and cash flows of the entity in conformity with the applicable financial reporting framework.

Quiz 18: Reports on Audited Financial Statements