Deck 4: Reports on Audited Financial Statements

Question 1

Green, CPA, was engaged to audit the financial statements of Essex Corporation after its fiscal year had ended. The timing of Green's appointment as auditor and the start of field work made confirmation of accounts receivable by direct communication with the debtors impracticable. Green applied other procedures and was satisfied as to the reasonableness of the account balances. Green's auditor's report most likely contained a(n) ________.

A) unqualified opinion
B) unqualified opinion with an explanatory paragraph
C) qualified opinion due to a scope limitation
D) qualified opinion due to a departure from generally accepted auditing standards

Answer 1

A

Question 2

An auditor will issue an adverse opinion when ________.

A) a severe scope limitation has been imposed by the client
B) a violation of GAAP is sufficiently material that a qualified opinion is not justified
C) a qualified opinion cannot be rendered because the auditor lacks independence
D) the company's ability to continue as a going concern is subject to substantial doubt

Answer 2

B

Question 3

An auditor most likely would issue a disclaimer of opinion because of ________.

A) inadequate disclosure of material information
B) the omission of the statement of cash flows
C) a material departure from generally accepted accounting principles
D) management's refusal to furnish written representations

Answer 3

D

Question 4

An audit report included an additional paragraph disclosing a difference of opinion between the auditor and the client. The auditor believed that an adjustment should be made to the financial statements. What should the opinion paragraph of the audit report express?

A) An unqualified opinion.
B) An "except for" opinion citing a departure from generally accepted accounting principles.
C) An "except for" opinion citing a scope limitation.
D) A disclaimer of opinion.

Question 5

Without the public accountant's knowledge or consent, the enterprise indicates that the public accountant (PA) was involved with information issued by the enterprise. Which of the following statements is true?

A) The PA has no responsibilities with respect to the information.
B) The PA should issue an opinion on the information.
C) The PA is not associated with the information.
D) The PA is associated with the information.

Question 6

CPA has been engaged to audit the financial statements of Marchano Ltd., a manufacturer of toys. Several individuals are suing the company because of a toy that injured children. The company has not disclosed the lawsuit in its financial statements. What type of audit report should be issued?

A) Adverse.
B) A GAAP qualification.
C) A scope qualification.
D) Disclaimer or denial

Question 7

Many users interpret audit reports based on the number of paragraphs. In a standard audit report on financial statements, how many paragraphs are there?

A) Three paragraphs.
B) Four paragraphs.
C) Five paragraphs.
D) Six paragraphs.

Question 8

Which level of assurance is provided by a public accountant as a result of an audit?

A) Complete assurance.
B) Moderate assurance.
C) Negative assurance.
D) Positive assurance.

Question 9

A disclaimer of opinion generally indicates ________.

A) the auditor is very uncertain with respect to an item and cannot form an opinion on the fairness of presentation of the financial statements as a whole
B) because of a lack of evidence, the auditor is uncertain with respect to an isolated item that is material but not so material that the auditor cannot form an opinion on the fairness of presentation of the financial statements as a whole
C) the auditor has observed a departure from generally accepted accounting principles that has a material effect upon the fairness of presentation of financial statements but the departure is not material enough to justify a qualified opinion
D) the auditor has observed a departure from generally accepted accounting principles that is so material that a qualified opinion is not justified

Question 10

If financial statements contain a very material departure from GAAP such that the financial statements are virtually useless, the auditor can render a(an) ________.

A) qualified "except for" opinion with reference to the departure
B) adverse opinion with scope limitation reference
C) adverse opinion with reference to the departure
D) disclaimer of opinion

Question 11

Under which of the following circumstances does an accountant become associated with a financial report?

A) The accountant works for the enterprise that issues the report.
B) The accountant sits on the board of directors of the enterprise that issues the report.
C) The enterprise indicates that the accountant audited or reviewed the information included in the report.
D) The report does not mention that the accountant prepared or performed other services with respect to the information.

Question 12

In which of the following circumstances is a public accountant (PA) considered associated with a company's financial information?

A) The PA is a former employee of the company and prepared the statements.
B) Financial statements are reproduced on the PA's letterhead.
C) The PA is engaged by the company's auditors to do limited procedures in a remote location.
D) The PA is married to the company's Chief Financial Officer.

Question 13

"The company has not made an allowance for bad debts for an account deemed uncollectible in the amount of $250,000 as of the year ended December 31, 2016." is an example of a ________.

A) GAAP change requiring a qualified opinion
B) scope limitation
C) departure from GAAP
D) report with a disclaimer of opinion

Question 14

A holding company has decided to carry its wholly owned subsidiary companies on the balance sheet using the equity method. The type of audit report required is ________.

A) unqualified
B) qualified
C) adverse
D) disclaimer

Question 15

What is the best description of the basis on which an auditor issues his or her report on financial statements?

A) Reporting standards.
B) Sufficiency and appropriateness of evidence.
C) Application of GAAP.
D) Integrity of management.

Question 16

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

A) The chief executive officer refuses the auditor access to minutes of board of directors' meetings.
B) Tests of controls show that the entity's internal control system is so poor that it cannot be relied upon.
C) The financial statements are not in accordance with the CPA Canada Handbook regarding the capitalization of leases.
D) Information comes to the auditor's attention that raises substantial doubt about the entity's ability to continue as a going concern.

Question 17

Which level of assurance requires a public accountant (PA) to gather the most evidence?

A) Audit.
B) Review.
C) Examination.
D) Compilation.

Question 18

Restrictions imposed by a client prohibited the observation of physical inventories that account for 35% of total assets. Alternative audit procedures for inventory were not feasible, although the auditor was able to obtain satisfactory evidence for all other items in the financial statements. The auditor should express ________.

A) an "except for" qualified opinion referring to a departure from generally accepted accounting principles
B) a disclaimer of opinion
C) an unqualified opinion with a separate explanatory paragraph
D) an unqualified opinion with an explanation in the scope paragraph

Question 19

Levels of assurance refer to ________.

A) the nature of the work performed and the conclusions auditors can render about financial statements
B) generally accepted auditing standards
C) qualifications, modifications, and expansions
D) changes in the language of the audit report

Question 20

In which of the following situations would an auditor ordinarily choose between expressing an "except for" qualified opinion or an adverse opinion?

A) The auditor did not observe the entity's physical inventory and is unable to become satisfied as to its balance by other auditing procedures.
B) The financial statements fail to disclose information that is required by generally accepted accounting principles.
C) The auditor is asked to report only on the entity's balance sheet and not on the other basic financial statements.
D) Events disclosed in the financial statements cause the auditor to have substantial doubt about the entity's ability to continue as a going concern.

Question 21

An auditor who is reporting on financial statements that contain a material departure from generally accepted accounting principles should include a separate explanatory paragraph and ________.

A) express a qualified or adverse opinion
B) not modify the opinion paragraph as long as the departure is adequately disclosed in a footnote
C) deny an opinion on the financial statements
D) express a qualified opinion or deny an opinion

Question 22

The words "except for" should be used in the scope paragraph only if there is a reservation resulting in a disclaimer of opinion or a scope qualification.

Question 23

When independence is lacking, an audit in accordance with generally accepted accounting standards is still possible.

Question 24

When the auditor is not independent, a GAAP departure qualification is required.

Question 25

When a client will not permit inquiry of outside legal counsel, the audit report will ordinarily contain a(n) ________.

A) disclaimer of opinion
B) "except for" qualified opinion regarding a departure from generally accepted accounting principles
C) unqualified opinion with a separate explanatory paragraph
D) adverse opinion

Question 26

When an adverse opinion is given, all the substantive reasons for the opinion must be disclosed in the report in basis of modification explanatory paragraphs.

Question 27

When an auditor concludes there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time, the auditor's responsibility is to ________.

A) prepare prospective financial information to verify whether management's plans can be effectively implemented
B) project future conditions and events for a period of time not to exceed one year following the date of the financial statements
C) issue a qualified or adverse opinion, depending upon materiality, due to the possible effects on the financial statements
D) consider the adequacy of disclosure about the entity's possible inability to continue as a going concern

Question 28

Management has decided that the life of a piece of heavy equipment should be decreased from 15 years to 10 years, thus increasing the annual amortization. The auditor agrees that this amortization period is more reflective of the nature of the asset. The type of audit report that should be issued is ________.

A) unqualified
B) qualified
C) adverse
D) disclaimer

Question 29

By its silence, a clean opinion implies that the financial statement disclosures are reasonably adequate.

Question 30

In Canada, when there has been a change in accounting principles and the effect of the change has been properly disclosed, the auditor should ________.

A) refer to the change in an explanatory paragraph
B) explicitly concur that the change is preferred
C) issue an unqualified opinion
D) refer to the change in the opinion paragraph

Question 31

Auditors cannot give negative assurance in an audit report.

Question 32

In which of the following circumstances may the auditor issue the standard unqualified, unmodified audit report?

A) The client disclosed a change in accounting principles with an immaterial effect on financial position and results of operations.
B) The financial statements do not disclose significant going concern issues.
C) The financial statements do not disclose a justified departure from generally accepted accounting principles.
D) The auditor has not been able to audit a substantial portion of the balance sheet because of circumstances beyond anyone's control.

Question 33

Auditing standards require that an appropriate communication be issued in all cases where an accountant's name is associated with financial information.

Question 34

An auditor decided to issue a qualified opinion on an entity's financial statements because a major inadequacy in its computerized accounting records prevented the auditor from applying necessary procedures. The opinion paragraph of the auditor's report should state that the qualification pertains to ________.

A) a GAAP departure
B) a departure from generally accepted auditing standards
C) the possible effect of the lack of audit evidence on the financial statements
D) inadequate disclosure of necessary information

Question 35

An independent auditor must consider whether the auditee 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 auditor should ________.

A) disclaim an opinion.
B) express an adverse opinion.
C) qualify the opinion.
D) express an unqualified opinion.

Question 36

The term "financial statements" includes all of the footnote disclosures

Question 37

Which of the following auditing procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern?

A) Inspecting title documents to verify whether any assets are pledged as collateral.
B) Confirming with third parties the details of arrangements to maintain financial support.
C) Reconciling the cash balance per books with the cut-off bank statement and the bank confirmation.
D) Comparing the entity's amortization and asset capitalization policies to other entities in the industry.

Question 38

Moderate assurance is typical in the review report of audited financial statements.

Question 39

Under which of the following circumstances would a disclaimer of opinion be appropriate?

A) The client refuses to allow the auditor to review the minutes of the board of director's meetings.
B) The financial statements fail to contain adequate disclosure of related party transactions.
C) The auditor is engaged during the year and is unable to observe opening physical inventories which are material.
D) The auditor has identified illegal payments to foreign officials made by the client's management.

Question 40

An accountant becomes associated with financial statements when he or she signs them as the Chief Financial Officer.

Question 41

In each of the circumstances listed below, match the situation to the type of opinion that should be given and write the identifying letter in the space provided.
A. Unqualified
B. Qualified
C. Adverse
D. Disclaimer
____ 1. Departure from GAAP of lesser materiality
____ 2. Scope limitation of significant materiality
____ 3. No GAAP departure and no scope limitation
____ 4. Scope limitation of lesser materiality
____ 5. Departure from GAAP of significant materiality

Question 42

Why must a CPA issue a report when associated with financial information?

Question 43

An organization undergoing significant going concern problems presents several challenges for the public accountant (PA) to consider. Discuss some of these.

Question 44

Both the auditor and the client work to avoid a report reservation.

Question 45

A scope limitation imposed by a client would result in an adverse opinion.

Question 46

For each of the independent situations presented below, state what type of audit report should be issued. Briefly explain your rationale. Finally, if your report would be other than the standard unqualified report, state which paragraphs, if any, of the standard audit report would be changed.
A. Grinner and Greeter, CPAs, were engaged to perform an audit of the financial statements of Happy, Inc. The management of Happy would not allow Grinner and Greeter to confirm any of the accounts receivable. All other audit procedures were performed as considered necessary by Grinner and Greeter and no other problems were discovered. However, Grinner and Greeter were unable to satisfy themselves as to the balance in accounts receivable.
A. The client has imposed a scope limitation on Grinner and Greeter. The type of report issued depends upon the materiality of accounts receivable and the likelihood that a potential error would be material or significantly material.
If the account receivable balance were insignificant and immaterial, then an unqualified report could be issued. If the likelihood that a potential error would be material or significantly material, then an opinion qualified as to scope or a disclaimer of opinion, respectively, would be appropriate.
For a qualified audit report, both the scope paragraph and the opinion paragraph would be modified using words such as "except for" or "except that" and referring to the reservation paragraph. A reservation paragraph that explains the scope limitation should be inserted between the scope and opinion paragraphs.
For a disclaimer of opinion, both the scope paragraph and the opinion paragraph would be modified and referenced to the reservation paragraph. A reservation paragraph that explains the scope limitation would be inserted between the scope and opinion paragraphs. The opinion paragraph would be modified to state that the auditor is "unable to express an opinion."
B. Because Johnson Manufacturing has not properly recorded a loss and a liability, the financial statements are not in accordance with GAAP. Therefore, depending on the materiality level, Tick and Tie should issue either a qualified opinion or an adverse opinion. In either case, a reservation paragraph that explains the GAAP departure should be inserted between the scope and opinion paragraphs. In the case of a qualified opinion, the opinion paragraph should be modified by using words such as "except for" or "except as" and by referring to the reservation paragraph. In the case of an adverse opinion, the opinion paragraph should be modified by using the words "these financial statements do not present fairly" and by referring to the reservation paragraph.
B. Tick and Tie, CPAs, were performing their annual audit of Johnson Manufacturing Company. Johnson is currently being sued for $2,000,000 related to an alleged defective product sold to a customer. Johnson's lawyer told Tick and Tie that it is likely that Johnson will lose the suit and have to pay the entire $2,000,000. The management of Johnson has included information about the lawsuit in the footnotes. However, they have not recorded any loss in the income statement or liability in the balance sheet.

Question 47

What are the three ways that accountants become associated with financial information issued by an enterprise?

Question 48

When there is material uncertainty that an auditee's ability to continue as a going concern is doubtful, and the issue has been fully disclosed in the notes to the financial statements, the auditor should issue a qualified report with a paragraph drawing attention to the going concern issue.

Question 49

What are the public accountant's responsibilities when he or she is associated with the financial information of a company?