Question 1

When there is a material inconsistency between the financial report and other information in the annual report, and the client refuses to change the information, the auditor should:
A) do nothing as the audit opinion is confined to the financial report.
B) include an emphasis of matter section in the audit report.
C) advise ASIC and the ASX.
D) issue a qualified opinion.

Accepted Answer

While the audit opinion is restricted to the financial report, the auditor should still highlight the material inconsistency between the financial report and other information in the annual report. The auditor should include an emphasis of matter section in the audit report to draw attention to the matter. This will ensure that users of the report are informed about the discrepancy and can make their own judgments.

Question 2

Angel Pty Ltd's financial report includes two balance sheets and profit and loss accounts.One set is drawn up in accordance with applicable accounting standards, and the other set is drawn up without complying with one standard, which the directors consider to make the accounts misleading.The auditors concur.The audit report should, therefore, contain:
A) an adverse opinion.
B) a qualified opinion with an emphasis of matter section.
C) a disclaimer of opinion.
D) an unmodified opinion with an emphasis of matter section.

Accepted Answer

An unmodified opinion with an emphasis of matter section is appropriate when the financial statements are prepared in accordance with applicable accounting standards, but there is a matter that needs to be emphasized. In this case, the directors and auditors believe that complying with one standard would make the accounts misleading, so they prepare an additional set of financial statements. The emphasis of matter section can be used to draw attention to this unusual situation while still issuing an unmodified opinion on the compliance with accounting standards.

Question 3

Auditing standards require that an audit report include the word 'independent' in the report's title.

Accepted Answer

According to auditing standards, the auditor's report must include the word "independent" in the report's title to emphasize that the auditor is impartial and not biased towards the entity being audited. Therefore, it is mandatory to include the word "independent" in the audit report title.

Question 4

It is more difficult to evaluate the materiality of potential errors resulting from a scope limitation than from a:
A) misstatement in the financial report.
B) going concern disclosure.
C) both A and B
D) none of the above

Accepted Answer

Misstatements in the financial report are more easily identifiable and quantifiable, whereas errors resulting from a scope limitation may be more subjective and difficult to assess in terms of their potential impact on the overall financial report. Therefore, it is more difficult to evaluate the materiality of potential errors resulting from a scope limitation compared to a misstatement in the financial report.

Question 5

The intent in the opinion statement is to indicate that the conclusion reached is based on fact.

Accepted Answer

The intent in an opinion statement is to express a subjective belief or viewpoint, not necessarily based on fact.

Question 6

The phrase 'generally accepted accounting principles' can be found in the auditor's responsibility paragraph of a standard unmodified report.

Accepted Answer

The phrase 'generally accepted accounting principles' is typically found in the management's responsibility section of an auditor's report, indicating that management is responsible for preparing the financial statements in accordance with these principles, not in the auditor's responsibility paragraph. The auditor's responsibility paragraph usually discusses the auditor's responsibility to conduct the audit in accordance with generally accepted auditing standards.

Question 7

The appropriate date for the report is the one on which the auditor completes the most important auditing procedures in the field.

Accepted Answer

The appropriate date for the audit report is the date on which the auditor has completed the audit work and has obtained sufficient appropriate audit evidence to support the auditor's opinion, not necessarily when the most important procedures were completed.

Question 8

It is appropriate to issue an opinion that contains the phrase 'because of the significance of the matter described in the Basis for Disclaimer of Opinion paragraph' when:
A) the auditor has not accumulated sufficient appropriate evidence to determine whether the financial report is presented fairly.
B) there has been a material misstatement on a particular matter that is material and pervasive.
C) there has been a material misstatement on a particular matter that is material.
D) none of the above

Accepted Answer

The phrase "because of the significance of the matter described in the Basis for Disclaimer of Opinion paragraph" is typically included in an audit report when the auditor has not been able to obtain sufficient appropriate evidence to determine whether the financial report is presented fairly. This may result from limitations on the scope of the audit, such as when the auditor was unable to confirm certain account balances or transactions, or when there are significant uncertainties related to the entity's ability to continue as a going concern. In such cases, the auditor may issue a disclaimer of opinion stating that they are unable to form an opinion on the financial statements as a whole.

Question 9

When the auditor concludes that there is substantial doubt about the entity's ability to continue as a going concern, and this has been adequately disclosed in the financial statements, the appropriate audit report is:
A) an adverse opinion with an emphasis of matter section.
B) a qualified opinion with an emphasis of matter section.
C) an unmodified opinion with no emphasis of matter section.
D) an unmodified opinion with an emphasis of matter section.

Accepted Answer

When the auditor concludes that there is substantial doubt about the entity's ability to continue as a going concern, and this has been adequately disclosed in the financial statements, the appropriate audit report is an unmodified opinion with an emphasis of matter section. This is because an unmodified opinion indicates that the financial statements are fairly presented in all material respects, while the emphasis of matter section draws the user's attention to management's uncertainty about the entity's ability to continue as a going concern. This provides additional information to the users of the financial statements without modifying the auditor's opinion on the financial statements as a whole.

Question 10

The most common case in which conditions beyond both the client's and the auditor's control cause a scope limitation is an engagement:
A) agreed upon after the client's balance sheet date.
B) where the auditor doesn't have enough staff to satisfactorily audit all of the client's foreign subsidiaries.
C) where the client is going through bankruptcy.
D) where the client won't allow the auditor to confirm receivables for fear of offending its customers.

Accepted Answer

Engagements agreed upon after the client's balance sheet date often result in scope limitations because the auditor may not be able to observe physical inventories or perform other procedures that should have been done at or before year-end.

Question 11

When a significant uncertainty exists and this has NOT been disclosed:
A) a scope limitation will need to be reported.
B) an inability to form an opinion must be used.
C) a qualified or an adverse opinion is required, depending on materiality.
D) an unmodified opinion with an emphasis of matter section is appropriate.

Accepted Answer

When a significant uncertainty exists and it has not been disclosed, the auditor must consider the materiality of the uncertainty. If it is material but not pervasive, a qualified opinion is required. If it is both material and pervasive, an adverse opinion is required.

Question 12

Goods Pty Ltd's financial report shows a profit increase of 20% on the previous year.The chairman's report in Goods Pty Ltd's annual report boasts of a 50% increase in profit from the previous year.The auditor's report should include:
A) an 'except for' qualified opinion.
B) an adverse opinion.
C) an emphasis of matter section.
D) a qualified opinion.

Accepted Answer

An emphasis of matter section is appropriate when the auditor wishes to draw attention to a matter that is appropriately presented or disclosed in the financial statements but does not affect the auditor's opinion on the overall financial statements. In this case, the discrepancy between the financial report and the chairman's report could be significant for users of the financial statements, and highlighting this in an emphasis of matter section would be appropriate to ensure users are aware of the discrepancy without suggesting that the financial statements themselves are incorrect.

Question 13

Professional standards require that a report be issued whenever a public accounting firm is associated with financial statements.

Accepted Answer

According to professional standards in accounting, a report must be issued by a public accounting firm whenever they are associated with financial statements. This helps to ensure that the financial information is accurate and reliable for users of the statements.

Question 14

Whenever an auditor adds an emphasis of matter section to an unmodified audit report, the implication is that the auditor:
A) does not know if the report is presented fairly.
B) is satisfied that the report is presented fairly 'except for' a specific aspect of it.
C) does not believe the report is presented fairly.
D) is satisfied that the report is presented fairly.

Accepted Answer

When an auditor adds an emphasis of matter section to an unmodified audit report, it indicates that while the auditor is satisfied that the financial statements are presented fairly in all material respects (in accordance with the applicable financial reporting framework), there is a matter that is appropriately presented or disclosed in the financial statements that the auditor believes is of such importance that it is fundamental to users’ understanding of the financial statements. This does not imply any dissatisfaction or doubt about the fairness of the financial statements.

Question 15

The most common type of audit report is the standard unmodified audit report.

Accepted Answer

The standard unmodified audit report is indeed the most common type of audit report. It indicates that the financial statements being audited are free from material misstatements and are presented fairly in all material respects.

Question 16

The signature section of the audit report identifies the public accounting firm that has performed the audit.

Accepted Answer

The signature section of the audit report typically includes the name and title of the auditor or audit team from the public accounting firm that has performed the audit. This helps to provide accountability and transparency by showing who is responsible for the audit and assuring users of the report that it has been independently and objectively reviewed.

Question 17

The audit report is normally addressed to the company's president or chief executive officer.

Accepted Answer

The audit report is typically addressed to the shareholders or the board of directors of the company, not directly to the president or chief executive officer.

Question 18

The Corporations Act requires that the financial report of a company must present a true and fair view of its state of affairs and profit (or loss)only.

Accepted Answer

The Corporations Act requires that the financial report of a company must present a true and fair view of its state of affairs and profit (or loss), but it also requires the presentation of cash flows and changes in equity.

Question 19

It is appropriate to issue an opinion that contains the phrase 'does not present a true and fair view' when:
A) the auditor has not accumulated sufficient appropriate evidence to determine whether the financial report is presented fairly.
B) there has been a material misstatement on a particular matter that is material.
C) there has been a material misstatement on a particular matter that is material and pervasive.
D) none of the above

Accepted Answer

The phrase 'does not present a true and fair view' is used in an auditor's opinion when there has been a material misstatement that is both material and pervasive, affecting the overall understanding of the financial report.

Question 20

The phrase 'auditing standards require that we...plan and perform the audit to obtain reasonable assurance whether the financial report is free of material misstatement' is included in the opinion paragraph of an audit report.

Accepted Answer

This phrase is typically included in the scope paragraph, not the opinion paragraph, of an audit report. The opinion paragraph states the auditor's conclusion about the financial statements.

Quiz 18: Audit reporting

When there is a material inconsistency between the financial report and other information in the annual report, and the client refuses to change the information, the auditor should:

Auditing standards require that an audit report include the word 'independent' in the report's title.

It is more difficult to evaluate the materiality of potential errors resulting from a scope limitation than from a:

The intent in the opinion statement is to indicate that the conclusion reached is based on fact.

The phrase 'generally accepted accounting principles' can be found in the auditor's responsibility paragraph of a standard unmodified report.

The appropriate date for the report is the one on which the auditor completes the most important auditing procedures in the field.

It is appropriate to issue an opinion that contains the phrase 'because of the significance of the matter described in the Basis for Disclaimer of Opinion paragraph' when:

When the auditor concludes that there is substantial doubt about the entity's ability to continue as a going concern, and this has been adequately disclosed in the financial statements, the appropriate audit report is:

The most common case in which conditions beyond both the client's and the auditor's control cause a scope limitation is an engagement:

When a significant uncertainty exists and this has NOT been disclosed:

Goods Pty Ltd's financial report shows a profit increase of 20% on the previous year.The chairman's report in Goods Pty Ltd's annual report boasts of a 50% increase in profit from the previous year.The auditor's report should include: