Question 1

An auditor is not required to tell the reader of an audit report when there has been a change in accounting principles that materially affects the financial statements.

Accepted Answer

An auditor is required to disclose any material changes in accounting principles that affect the financial statements in the audit report. This helps ensure that the reader of the report is aware of any significant changes that may impact their understanding of the financial statements. The disclosure should include a description of the change, its impact on the financial statements, and the reasons for the change.

Question 2

Andrews Corporation adopted an accounting principle that is a material departure from GAAP. The auditor determined that the financial statements are fairly presented, except for this specifically identifiable GAAP departure, and therefore would issue a disclaimer of opinion.

Accepted Answer

The auditor would likely issue a qualified opinion or an adverse opinion, not a disclaimer of opinion, because the departure from GAAP is specifically identifiable and the rest of the financial statements are fairly presented. A disclaimer of opinion is issued when the auditor cannot obtain sufficient appropriate audit evidence on which to base the opinion.

Question 3

The audit report is modified to five paragraphs as a result of another audit firm performing part of the financial statement audit.

Accepted Answer

The audit report is modified to include an "Other Auditors" paragraph if another firm is involved, but it does not necessarily result in a five-paragraph report.

Question 4

Under international auditing standards, when the audit client has engaged other audit firms to audit remote locations around the country, the principal auditor must mention the other audit firms in the audit report.

Accepted Answer

Under international auditing standards, the principal auditor is not required to mention other audit firms engaged by the audit client to audit remote locations in the audit report, unless the principal auditor decides to make reference to the work of the other auditors as a basis, in part, for the principal auditor's opinion.

Question 5

The term "except for" is used in the opinion paragraph of an audit report that will be qualified for a GAAP violation that is not pervasive.

Accepted Answer

The term "except for" is typically used in the opinion paragraph of an audit report to indicate that the financial statements are fairly presented except for a specific issue that has been identified, such as a GAAP violation. When the violation is not considered to be pervasive, meaning it does not impact the overall fairness of the financial statements, the opinion may still be qualified but the use of the term "except for" is appropriate.

Question 6

The audit report can be a verbal presentation to the audit committee about the client.

Accepted Answer

The audit report is a written document that details the auditor's findings and opinion about the client's financial statements. It is submitted to both the client and the audit committee. While the auditor may choose to verbally present their findings and answer any questions from the committee, this does not replace the official audit report.

Question 7

The audit report delineates the responsibility of client management and that of the audit firm.

Accepted Answer

The audit report typically includes a section stating the responsibility of management for the preparation of the financial statements and the responsibility of the audit firm for expressing an opinion on those statements.

Question 8

After the balance sheet date but prior to the audit report date the client decides to acquire Bargain Company to obtain a significant increase in revenues. The auditor would probably give a report that includes the statement: "except for the acquisition of Bargain Company..".

Accepted Answer

The acquisition of Bargain Company after the balance sheet date is a subsequent event that does not affect the financial statements as of the balance sheet date. The auditor would not qualify the report with "except for" unless there was a material misstatement or lack of disclosure in the financial statements.

Question 9

The substantial doubt about an entity's ability to continue as a going concern is a phrase that is used in an unqualified opinion with a certain type of explanatory language.

Accepted Answer

An unqualified opinion with explanatory language is issued when there is substantial doubt about an entity's ability to continue as a going concern, but the financial statements are still fairly presented.

Question 10

An important component of an audit report is that the title includes the word "competent."

Accepted Answer

The title of an audit report typically includes words like "independent," "unbiased," or "objective," but not "competent." The competence of the auditor is assumed and demonstrated through their qualifications, experience, and adherence to auditing standards.

Question 11

A client that has a departure from generally accepted accounting principles that is immaterial will receive a qualified or adverse opinion.

Accepted Answer

If a departure from generally accepted accounting principles is immaterial, the auditor will include an explanatory paragraph in their report but will not modify their opinion. Therefore, the client will receive an unqualified opinion. A qualified or adverse opinion is only given if the departure from GAAP is material and pervasive.

Question 12

An unqualified audit opinion with an explanatory paragraph often makes reference to the footnotes of the financial statements

Accepted Answer

An explanatory paragraph added to an unqualified audit opinion may refer to information in the footnotes of the financial statements that is considered important for understanding the financial statements.

Question 13

When there is an uncertainty surrounding the financial statements, the auditor may still be able to give an unqualified opinion.

Accepted Answer

Although there may be uncertainty surrounding the financial statements, the auditor may still be able to provide an unqualified opinion if they believe the financial statements fairly present the financial position and operating results of the company. However, the auditor may need to disclose the uncertainty in the audit report.

Question 14

The auditor should only provide an opinion on the financial statements if the opinion indicates that the financial statements are fairly stated in all material respects.

Accepted Answer

The auditor's role is to provide an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework, which can include an unqualified (clean), qualified, adverse, or a disclaimer of opinion, depending on the findings of the audit.

Question 15

For some engagements, the financial statements might be audited in accordance with multiple auditing standards.

Accepted Answer

In some cases, companies might be required to follow multiple auditing standards based on their location, industry or regulatory requirements. For example, a company listed on the New York Stock Exchange might be required to conduct an audit in accordance with both the US Generally Accepted Auditing Standards (GAAS) and the Public Company Accounting Oversight Board (PCAOB) standards. Similarly, multinational companies might need to follow auditing standards of multiple countries where they operate.

Question 16

For the last several years, both the Financial Accounting Standards Board (FASB) and the International Auditing and Assurance Standards Board (IAASB) have been considering possible changes to the standard unqualified audit report.

Accepted Answer

The answer of For the last several years, both the...

Question 17

There are no differences in audit report requirements across the standards of the AICPA, PCAOB, and IAASB.

Accepted Answer

While there may be some common elements across the audit report requirements of these three standards-setting bodies, there are also notable differences. For example, the PCAOB and IAASB require the inclusion of a key audit matter section in certain audit reports, while the AICPA does not have such a requirement. Additionally, the wording and structure of the audit report may differ slightly between the standards.

Question 18

A justified departure from GAAP will result in the issuance of an adverse opinion.

Accepted Answer

A justified departure from GAAP may result in a qualified opinion rather than an adverse opinion. An adverse opinion is given when the financial statements are materially misstated and departures from GAAP are not justified. A qualified opinion is given when the financial statements are materially misstated but the effects on the financial statements can be determined or when there is a justified departure from GAAP but the effects on the financial statements are material.

Question 19

When financial statements contain generally accepted accounting principles in the current year that are different from the generally accepted accounting principles used in the preceding year, the auditor will typically make mention of it in the opinion.

Accepted Answer

The auditor is required to include a statement in their opinion if there has been a change in accounting principles from the prior year. This is to inform the users of the financial statements about the change and how it may impact the comparability of the financial statements.

Question 20

A client that treats a material lease transaction as an operating lease when it is in fact a capital lease has deviated from GAAP and will receive a qualified or adverse opinion.

Accepted Answer

According to GAAP, if a client incorrectly classifies a material lease transaction as an operating lease when it should be a capital lease, it would lead to a deviation from GAAP and result in a qualified or adverse opinion on their financial statements.

Quiz 15: Audit Reports on Financial Statements