Question 1

The situation in which predecessor auditors allow a previously issued report to be used but have not conducted any auditing procedures to verify that this report is still appropriate is referred to as a(n)_____________________________ report.

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Question 2

Following are two independent situations.
A. Grinner and Greeter, CPAs, were engaged to perform an audit of the financial statements of Happy, Inc. Happy's management would not allow Grinner and Greeter to confirm any of the accounts receivable. All other auditing procedures were performed as considered necessary by Grinner and Greeter and no issues were encountered. However, Grinner and Greeter were unable to satisfy themselves with regard to the balance in accounts receivable.
A. The company has imposed a scope limitation on Grinner and Greeter. Although it is possible to issue a qualified opinion for a less material scope limitation, disclaimers of opinion are more appropriately issued for client-imposed scope limitations than for circumstance-imposed scope limitations. For the disclaimer of opinion, (1) the introductory paragraph would be modified to state that auditors were engaged to audit the financial statements and delete the sentence referring to the auditors' responsibility for the financial statements, (2) the scope paragraph would be omitted, (3) an additional paragraph would be added to describe the scope limitation, and, (4) the opinion paragraph would be modified to express a disclaimer of opinion.
B. Because Johnson Manufacturing has not properly recorded a loss and a liability, the financial statements are not in conformity with generally accepted accounting principles. Therefore, depending on the overall materiality and pervasiveness of the misstatement, Tick and Tie should issue either a qualified or adverse opinion. In each case, a third paragraph would be added to the report to explain the departure from GAAP and the opinion paragraph would be modified to express either a qualified opinion or an adverse opinion.
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 that they sold to a customer. Johnson's legal counsel has told Tick and Tie that it is probable that Johnson will lose the suit and have to pay the entire $2,000,000. Johnson's management has included information in the footnotes about the lawsuit. However, they have not recorded any loss or liability in the income statement or balance sheet.
Required:
For each of the two independent situations, state what type of opinion should be issued on the company's financial statements. Briefly explain your rationale. Finally, state which paragraphs, if any, of the standard report would be modified.

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A. Grinner and...

Question 3

An engagement in which auditors express opinions on both the client's financial statements and internal control over financial reporting are referred to as a(n)_____________________________________.

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Question 4

When presenting reports on the entity's financial statements and internal control over financial reporting,the auditors can present separate reports or a(n)_____________________________ report.

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Question 5

For each of the following words and phrases from the auditors' standard report on the entity's financial statements,indicate by letter in which paragraph of the standard report they should appear:
A. Introductory
B. Scope
C. Opinion

Accepted Answer

The answer of For each of the following words and...

Question 6

Why must auditors issue a report when they are associated with financial statements? What guidelines are provided for situations in which auditors lack independence with respect to the client?

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Question 7

Assume that auditors prepare separate reports on the entity's financial statements and internal control over financial reporting.Following are various phrases and characteristics associated with auditors' reports.For each phrase or characteristic,indicate by letter whether the phrase or characteristic is related to the report on the entity's financial statements,report on the entity's internal control over financial reporting,both reports,or neither report.
A. Report on entity's financial statements.
B. Report on internal control over financial reporting.
C. Both reports.
D. Neither report.

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The answer of Assume that auditors prepare separate reports on...

Question 8

In each of the following circumstances,indicate by appropriate letter which of the following types of opinions should be rendered on the entity's financial statements.
A. Unqualified
B. Qualified
C. Adverse
D. Disclaimer

Accepted Answer

The answer of In each of the following circumstances,indicate by...

Question 9

For each of the following situations,indicate by letter the type of report most likely to be issued.
A.Unqualified opinion,no modification.
B.Unqualified opinion,explanatory paragraph for consistency.
C.Unqualified opinion,explanatory paragraph for Rule 203.
D.Unqualified opinion,explanatory paragraph for emphasis of a matter.
E.Unqualified opinion,explanatory paragraph for a going-concern uncertainty.
F.Qualified opinion.
G.Disclaimer of opinion
____ 1.The entity has a lawsuit pending against it.There is significant uncertainty about the outcome of the lawsuit,which could have a highly material impact on the viability of the entity.Management has provided adequate disclosure of the lawsuit in the footnotes accompanying the financial statements.
____ 2.The entity has a lawsuit pending against it and it is probable that the entity will lose the suit.Management has accrued the best estimate of the loss and provided adequate disclosure.It is not expected that this lawsuit will have a significant effect on the entity's ability to continue as a going concern.
____ 3.The entity has a lawsuit pending against it and it is probable that the entity will lose the suit.Management has not accrued the best estimate of the loss but has provided information in the footnotes.It is not expected that this lawsuit will have a significant effect on the entity's ability to continue as a going concern.
____ 4.Based on recent analysis of usage,the entity has changed the useful life of its office equipment from five to four years.This change is reflected in the depreciation amounts computed for the current year.
____ 5.The entity uses an accounting principle for a class of transactions that is not acceptable under current GAAP.The entity believes and the auditors concur that the financial statements would be misleading if GAAP were to be followed.

Accepted Answer

The answer of For each of the following situations,indicate by...

Question 10

Murray & Co.,CPAs,completed the audit of Classic,Inc.,a public entity,on March 1,2013 for a January 31,2013 fiscal year-end.The audit team encountered no significant issues and found no material misstatements.Murray & Co.has audited Classic,Inc.,for several years,and past audits did not reveal any significant issues or material misstatements.The audit team partner determined that a standard report on Classic's financial statements was appropriate.The auditors' report,drafted by I.M.Nu,a staff assistant,follows.
We have audited the accompanying consolidated balance sheets of Classic,Inc.and subsidiaries as of January 31,2013,and 2012,the related consolidated statements of shareholders' equity,and cash flows for each of the years in the three-year period ended January 31,2013.These financial statements are the responsibility of Classic,Inc.'s management.
We conducted our audits in accordance with the Statements on Auditing Standards issued by the Auditing Standards Board of the American Institute of Certified Public Accountants.Those standards require that we plan and perform the audit to obtain absolute assurance about whether the financial statements are free of material misstatement.An audit includes examining,on a test basis,evidence supporting the amounts and disclosures in the financial statements.An audit also includes assessing the internal controls,accounting principles used,and significant estimates made by management as well as evaluating the overall financial statement presentation.We believe that our audits provide an unconditional basis for our opinion.
In our opinion,the financial statements referred to above correctly show the financial position of Classic,Inc.and consolidated subsidiaries at January 31,2013 and 2012,and the results of their operations for the years then ended.
Required:
Identify the deficiencies and errors in the draft report.Do not rewrite the report,but be specific as to what is incorrect or omitted.Organize your answer by paragraph.

Accepted Answer

The answer of Murray & Co.,CPAs,completed the audit of Classic,Inc.,a...

Question 11

When reporting on _____________________________________,auditors should indicate that these statements have been derived from the complete set of financial statements,which have been audited.

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Question 12

Indicate the type of report on the entity's financial statements that would be required for each of the following circumstances.Assume any amount in question is material on an overall basis (but not pervasive)unless otherwise stated.

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The answer of Indicate the type of report on the...

Question 13

For each of the following sentences or phrases,indicate by letter in which paragraph of the standard report on the entity's financial statements the sentence or phrase would appear.
A. Introductory
B. Scope
C. Opinion

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The answer of For each of the following sentences or...

Question 14

Auditors' decision to select between a qualified opinion or adverse opinion for a departure from GAAP would depend upon the materiality and __________________________ of the effects of the departure.

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The answer of Auditors' decision to select between a qualified...

Quiz 12: Reports on Audited Financial Statements