Question 1

When a company's financial statements contain a departure from GAAP with which the auditor concurs, the departure should be explained in

Accepted Answer

A separate paragraph should be used to explain the departure from GAAP in the financial statements. This helps to ensure that users of the financial statements are aware of the specific departure and can make informed decisions based on the information presented. It also separates the explanation from other information in the financial statements, making it easier for users to find and understand.

Question 2

A company has changed its method of inventory valuation from an unacceptable one to one in conformity with generally accepted accounting principles. The auditor's report on the financial statements of the year of the change should include

Accepted Answer

The auditor's report should include an explanatory paragraph explaining the change in inventory valuation method. This paragraph should also explain the impact of the change on reported net income. A reference to a prior period adjustment may not be necessary if the change was made in the current year and did not require restatement of prior year financial statements. The auditor's report should still reference consistency, but the reference should indicate that the change was made and explained in the explanatory paragraph. Therefore, option D is the best choice.

Question 3

All of the following would require an emphasis of matter paragraph except for

Accepted Answer

An emphasis of matter paragraph is used by auditors to draw attention to matters that are appropriately presented or disclosed in the financial statements. The lack of auditor independence is a fundamental issue that would preclude the auditor from issuing an opinion on the financial statements, rather than leading to an emphasis of matter paragraph.

Question 4

No reference is made in the auditor's report to other auditors who perform a portion of the audit when I. the other auditor audited an immaterial portion of the audit.
II) the other auditor is well known or closely supervised by the principle auditor.
III) the principle auditor has thoroughly reviewed the work of the other auditor.

Accepted Answer

Reference to other auditors in the auditor's report is generally not necessary when the portion of the audit they performed is immaterial, when they are well known or closely supervised by the principal auditor, or when the principal auditor has thoroughly reviewed their work. This ensures the principal auditor takes full responsibility for the audit opinion.

Question 5

When there is uncertainty about a company's ability to continue as a going concern, the auditor's concern is the possibility that the client may not be able to continue its operations or meet its obligations for a "reasonable period of time." For this purpose, a reasonable period of time is considered not to exceed

Accepted Answer

A reasonable period of time in this context is considered to be one year from the date of the financial statements. Therefore, option B is the most appropriate. Options A and C are incorrect as they are too short, while option D extends beyond the reasonable limit.

Question 6

Indicate which change(s) would require an explanatory paragraph in the audit report.

Accepted Answer

The answer of Indicate which change(s) would require an explanatory...

Question 7

Which of the following is least likely to cause uncertainty about the ability of an entity to continue as a going concern?

Accepted Answer

A lawsuit over a minor patent infringement is unlikely to have a significant impact on the entity's ability to continue as a going concern. The other options listed have a higher likelihood of causing uncertainty about the entity's ability to continue as a going concern.

Question 8

When an auditor is trying to determine how changes can affect consistency and/or comparability, he or she should keep in mind that

Accepted Answer

Changes that affect consistency require an explanatory paragraph if they are material. This is in accordance with Generally Accepted Auditing Standards (GAAS) which require the auditor to disclose any material departures from Generally Accepted Accounting Principles (GAAP) in the auditor's report. Changes that affect comparability may also require disclosure in the footnotes, but do not necessarily require an explanatory paragraph or a disclaimer of opinion.

Question 9

The term "explanatory paragraph" was replaced in the AICPA auditing standards with

Accepted Answer

The term "explanatory paragraph" was replaced in the AICPA auditing standards with "emphasis-of-matter paragraph" to highlight important matters related to the financial statements, such as uncertainties or significant events that may have a material impact on the entity's financial position. The other answer choices (A, C, and D) do not accurately reflect the replacement terminology.

Question 10

Which of the following requires recognition in the auditor's opinion as to consistency?

Accepted Answer

A change from the cost method to the equity method of accounting for investments in common stock is a change in accounting principle that requires recognition in the auditor's opinion as to consistency. The other options are either immaterial or not a change in accounting principle.

Question 11

When there is a lack of consistent application in accounting principles,

Accepted Answer

When there is a lack of consistent application in accounting principles, all of the above options should be considered. The nature and impact of the change should be disclosed, the auditor should discuss the change and direct the reader to the appropriate footnote, and the materiality of the change should be evaluated based on its effect in the current year.

Question 12

Which of the following is false concerning the principal CPA firm's alternatives when issuing a report when another CPA firm performs part of the audit?

Accepted Answer

A joint report signed by both CPA firms is not a standard practice. The principal CPA firm can either make no reference to the other firm or modify the wording to share responsibility, but a joint report is not typically issued.

Question 13

William Gregory, CPA, is the principal auditor for an international corporation. Another CPA has examined and reported on the financial statements of a significant subsidiary of the corporation. Gregory is satisfied with the independence and professional reputation of the other auditor, as well as the quality of the other auditor's examination. With respect to his report on the consolidated financial statements, taken as a whole, Gregory

Accepted Answer

According to Generally Accepted Auditing Standards (GAAS), Gregory may refer to the examination of the other auditor in his report on the consolidated financial statements, but he is not required to do so. Therefore, choice C is the best answer. Gregory may choose to refer to the other auditor's examination in his report if he believes it would provide useful information to the reader. However, if he does refer to the other auditor's examination, he must ensure that it is accurate and complete.

Question 14

Indicate which change(s) would require an explanatory paragraph in the audit report.

Accepted Answer

The answer of Indicate which change(s) would require an explanatory...

Question 15

When the auditor concludes that there is substantial doubt about the entity's ability to continue as a going concern, the appropriate audit report could be I. an unmodified opinion audit report with an explanatory paragraph.
II) a disclaimer of opinion.

Accepted Answer

When the auditor concludes that there is substantial doubt about the entity's ability to continue as a going concern, the appropriate audit report could either be an unmodified opinion audit report with an explanatory paragraph or a disclaimer of opinion. The choice depends on the severity of the doubt and its impact on the financial statements. Therefore, both options are valid in this scenario.

Question 16

Under AICPA auditing standards, the primary auditor issuing the opinion on the financial statements is called the

Accepted Answer

The answer of Under AICPA auditing standards, the primary auditor...

Question 17

Indicate which change(s) would require an explanatory paragraph in the audit report.

Accepted Answer

The answer of Indicate which change(s) would require an explanatory...

Question 18

Which of the following modifications of the auditor's report does not include an explanatory paragraph?

Accepted Answer

A principal auditor accepting the work of another auditor does not require an explanatory paragraph in the auditor's report. This is a matter of audit procedure rather than a modification of the opinion or an emphasis of a matter that needs to be explicitly communicated in the report.

Question 19

Indicate which change(s) would require an explanatory paragraph in the audit report.

Accepted Answer

Change C involves a significant alteration in the financial statements that would require an explanatory paragraph in the audit report. The other changes (A, B, and D) do not involve material changes in the financial statements that require an explanatory paragraph.

Question 20

Which of the following are changes that affect the comparability of financial statements but not the consistency and therefore, do not have to be included in the auditor's report?

Accepted Answer

Changes that affect the comparability of financial statements but not their consistency, such as error corrections not involving principles, changes in accounting estimates, and variations in the format and presentation of financial information, do not require disclosure in the auditor's report regarding consistency. These changes do not involve a shift in accounting principles or methods but rather adjustments and presentations within the existing framework.

Quiz 3: Audit Reports

When a company's financial statements contain a departure from GAAP with which the auditor concurs, the departure should be explained in

A company has changed its method of inventory valuation from an unacceptable one to one in conformity with generally accepted accounting principles. The auditor's report on the financial statements of the year of the change should include

All of the following would require an emphasis of matter paragraph except for

Indicate which change(s) would require an explanatory paragraph in the audit report.

Which of the following is least likely to cause uncertainty about the ability of an entity to continue as a going concern?

When an auditor is trying to determine how changes can affect consistency and/or comparability, he or she should keep in mind that

The term "explanatory paragraph" was replaced in the AICPA auditing standards with

Which of the following requires recognition in the auditor's opinion as to consistency?

When there is a lack of consistent application in accounting principles,

Which of the following is false concerning the principal CPA firm's alternatives when issuing a report when another CPA firm performs part of the audit?

Indicate which change(s) would require an explanatory paragraph in the audit report.

When the auditor concludes that there is substantial doubt about the entity's ability to continue as a going concern, the appropriate audit report could be I. an unmodified opinion audit report with an explanatory paragraph. II) a disclaimer of opinion.

Under AICPA auditing standards, the primary auditor issuing the opinion on the financial statements is called the

Indicate which change(s) would require an explanatory paragraph in the audit report.

Which of the following modifications of the auditor's report does not include an explanatory paragraph?

Indicate which change(s) would require an explanatory paragraph in the audit report.

Which of the following are changes that affect the comparability of financial statements but not the consistency and therefore, do not have to be included in the auditor's report?