Question 1

Which of the following scenarios does not result in a qualified opinion?

Accepted Answer

Lack of independence with respect to the audited entity results in a disclaimer of opinion, not a qualified opinion. A qualified opinion is issued when the financial statements contain material departures from GAAP, the auditor is unable to gather sufficient evidence or the auditor is unable to complete an important audit procedure due to a scope limitation. Circumstances that prevent the auditor from conducting a complete audit also result in a disclaimer of opinion. The use of an accounting principle at variance with GAAP also results in a qualified opinion.

Question 2

Client imposed restrictions on the audit always require a disclaimer of opinion.

Accepted Answer

Client-imposed restrictions on the audit may lead to a disclaimer of opinion if the restrictions prevent the auditor from obtaining sufficient appropriate audit evidence. However, auditors may also consider other types of opinions or modify their report depending on the nature and extent of the restrictions and the ability to obtain sufficient evidence through alternative procedures.

Question 3

When analyzing the various types of opinions that the auditor can issue,

Accepted Answer

A qualified opinion is issued when the auditor concludes that the financial statements are fairly stated except for a specific issue.

Question 4

When comparing misstatements with a measurement base, the auditor must consider the pervasiveness of the misstatement. Of the following examples, the most pervasive misstatement is a(n)

Accepted Answer

An understatement of inventory affects multiple accounts and financial statements, such as cost of goods sold, gross margin, and the balance sheet. This misstatement is considered the most pervasive because it affects several accounts and financial statements. The other examples are more limited in their impact.

Question 5

Auditors should issue a disclaimer of opinion when there is a highly material client-imposed scope restriction.

Accepted Answer

When there is a highly material client-imposed scope restriction, auditors are limited in obtaining sufficient appropriate audit evidence to support their opinion. Therefore, a disclaimer of opinion is appropriate.

Question 6

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

Accepted Answer

When an auditor is appointed after the client's year-end, certain auditing procedures that should ideally be performed at or before year-end (such as observing inventory counts) cannot be carried out, leading to a scope restriction that is beyond the control of both the client and the auditor.

Question 7

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

Accepted Answer

An adverse opinion is expressed when the financial statements materially depart from accounting standards and are not fairly presented. In this case, not conforming to the FASB statement on loss contingencies would be a basis for an adverse opinion because it indicates that the financial statements do not accurately reflect the company's financial position according to generally accepted accounting principles (GAAP).

Question 8

There are three conditions necessitating a departure from an unqualified audit report. Name, discuss and state the appropriate audit report for each of these three conditions.

Accepted Answer

The answer of There are three conditions necessitating a departure...

Question 9

An auditor should issue a qualified opinion with an explanatory paragraph whenever there is a material uncertainty affecting the financial statements.

Accepted Answer

An auditor may issue a qualified opinion if there is a material misstatement that is not pervasive. However, for material uncertainties that cast significant doubt on the entity's ability to continue as a going concern, the auditor would add an emphasis-of-matter paragraph to the audit report, not necessarily issue a qualified opinion.

Question 10

A misstatement in the financial statements can be considered material if knowledge of the misstatement will affect a decision of

Accepted Answer

A misstatement in the financial statements can be considered material if it would affect a reasonable user's decision. The decision could be related to investing, lending, or other economic decisions. The other options such as PCAOB, accountant, and SEC may have a role in detecting or reporting the misstatement, but the materiality assessment is based on how it affects the users of the financial statements.

Question 11

Whenever the client imposes restrictions on the scope of the audit, the auditor should be concerned that management may be trying to prevent discovery of misstatements. In such cases, the auditor will likely issue a

Accepted Answer

When a client imposes restrictions on the scope of the audit, it raises concerns about the potential for undiscovered misstatements. If these restrictions affect the auditor's ability to obtain sufficient appropriate audit evidence, especially regarding material aspects of the financial statements, the auditor may issue a disclaimer of opinion. This is because the auditor cannot conclude on the overall fairness of the financial statements due to the scope limitation.

Question 12

Misstatements must be compared with some measurement base before a decision can be made about materiality. A commonly accepted measurement base includes

Accepted Answer

All of the above (net income, total assets, and working capital) are commonly accepted measurement bases for assessing materiality. Depending on the nature of the misstatement and the specific circumstances of the entity, any or all of these measures may be relevant in determining whether a misstatement is material. For example, a misstatement that affects net income by a small amount may not be material if the company has large total assets and a significant amount of working capital. Therefore, using multiple measures can provide a more comprehensive view of the potential impact of a misstatement.

Question 13

When an auditor discovers a highly material GAAP violation in the financial statements and the client refuses to correct it, the auditor should issue a disclaimer of opinion.

Accepted Answer

When an auditor discovers a highly material GAAP violation and the client refuses to correct it, the auditor should issue an adverse opinion, not a disclaimer of opinion. A disclaimer of opinion is issued when the auditor cannot form an opinion on the financial statements, whereas an adverse opinion is issued when the financial statements materially misrepresent the financial position of the company.

Question 14

If the phrase "except for" is present in the opinion paragraph of the audit report, the auditor has issued a(n)

Accepted Answer

The phrase "except for" is commonly used in a qualified opinion to indicate the existence of a limitation on the scope of the audit or a departure from Generally Accepted Accounting Principles (GAAP) in the financial statements. This means the auditor has found some issues or discrepancies but overall believes the financial statements are fairly presented.

Question 15

A qualified opinion audit report is issued when all auditing conditions have been met, no significant misstatements have been discovered, and it is the auditor's opinion that the financial statements are fairly stated in accordance with GAAP.

Accepted Answer

A qualified opinion audit report is actually issued when there are limitations in the scope of the audit or there is a departure from GAAP, but it is not significant enough to warrant an adverse opinion.

Question 16

A qualified report can take the form of a qualification of both the scope and the opinion or of the opinion alone.

Accepted Answer

A qualified report can indeed take the form of a qualification of both the scope and the opinion or of the opinion alone. This means that either the auditor is unable to obtain sufficient evidence to support a clean opinion, or that they disagree with the financial statements but are still able to issue an opinion with reservations.

Question 17

Items that materially affect the comparability of financial statements generally require disclosure in the footnotes. If the client refuses to properly disclose the item, the auditor will most likely issue

Accepted Answer

A qualified opinion is issued when the financial statements present the entity's financial position, results of operations, and cash flows in conformity with generally accepted accounting principles, except for the effects of a material matter about which there is a disagreement or a limitation on the scope of the audit. If a client refuses to disclose information that materially affects the comparability of financial statements, the auditor may issue a qualified opinion due to the lack of adequate disclosure.

Question 18

Which of the following statements is true?
I. The auditor is required to issue a disclaimer of opinion in the event of a material uncertainty.
II. The auditor is required to issue a disclaimer of opinion in the event of a going concern problem.

Accepted Answer

A material uncertainty related to going concern does not automatically lead to a disclaimer of opinion. The auditor may express an unmodified opinion with an emphasis of matter paragraph regarding the going concern uncertainty. Similarly, a going concern problem does not always result in a disclaimer of opinion; the response depends on the specific circumstances and the adequacy of disclosure in the financial statements.

Question 19

When the client fails to make adequate disclosure in the body of the statements or in the related footnotes, it is the responsibility of the auditor to

Accepted Answer

When the client fails to make adequate disclosure, it is the responsibility of the auditor to present the information in the audit report and issue a qualified or an adverse opinion depending on the materiality and pervasiveness of the lack of disclosure. Therefore, option D is the best choice as it includes both options based on the severity of the issue.

Question 20

Whenever an auditor issues a qualified report, he or she must use the term "except for " in the opinion paragraph.

Accepted Answer

This is true. When an auditor issues a qualified report, they must use the term "except for" in the opinion paragraph to indicate the reason for the qualification.

Quiz 3: Audit Reports