Question 1

An auditor who is reporting on financial statements that contain a material departure from generally accepted accounting principles should include a separate explanatory paragraph and ________.
A) express a qualified or adverse opinion
B) not modify the opinion paragraph as long as the departure is adequately disclosed in a footnote
C) deny an opinion on the financial statements
D) express a qualified opinion or deny an opinion

Accepted Answer

According to auditing standards, when there is a material departure from generally accepted accounting principles, the auditor should express a qualified or adverse opinion and include a separate explanatory paragraph in the audit report. This is in addition to modifying the opinion paragraph and including the departure in a footnote. Therefore, choice A is the best choice. Choices B and C are incorrect because simply disclosing the departure in a footnote or denying an opinion is not enough when the departure is material. Choice D is partially correct, but expressing a qualified opinion is the most common response in practice.

Question 2

The words "except for" should be used in the scope paragraph only if there is a reservation resulting in a disclaimer of opinion or a scope qualification.

Accepted Answer

The words "except for" are usually used to indicate a limitation or exception to the auditor's opinion. This could result in a disclaimer of opinion or a scope qualification indicating that the auditor was unable to obtain sufficient evidence to support a particular aspect of the financial statements. Therefore, the use of "except for" in the scope paragraph is usually indicative of a limitation or exception to the opinion.

Question 3

When independence is lacking, an audit in accordance with generally accepted accounting standards is still possible.

Accepted Answer

Independence is a fundamental requirement for auditors to conduct an audit in accordance with generally accepted auditing standards. Without independence, the audit's objectivity and credibility are compromised.

Question 4

When the auditor is not independent, a GAAP departure qualification is required.

Accepted Answer

When an auditor is not independent, they must disclaim an opinion rather than issue a qualified opinion due to a GAAP departure.

Question 5

When a client will not permit inquiry of outside legal counsel, the audit report will ordinarily contain a(n) ________.
A) disclaimer of opinion
B) "except for" qualified opinion regarding a departure from generally accepted accounting principles
C) unqualified opinion with a separate explanatory paragraph
D) adverse opinion

Accepted Answer

A disclaimer of opinion is appropriate when the auditor is unable to obtain sufficient appropriate evidence to support an opinion on the financial statements. If the client does not permit inquiry of outside legal counsel, this limitation on the scope of the audit may prevent the auditor from obtaining the necessary evidence to form an opinion on the financial statements, thus requiring a disclaimer of opinion.

Question 6

When an adverse opinion is given, all the substantive reasons for the opinion must be disclosed in the report in basis of modification explanatory paragraphs.

Accepted Answer

This statement is true. According to auditing standards, when an adverse opinion is given, the report must disclose all substantive reasons for the opinion in basis of modification explanatory paragraphs. This provides transparency and clarity for stakeholders reading the report.

Question 7

When an auditor concludes there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time, the auditor's responsibility is to ________.
A) prepare prospective financial information to verify whether management's plans can be effectively implemented
B) project future conditions and events for a period of time not to exceed one year following the date of the financial statements
C) issue a qualified or adverse opinion, depending upon materiality, due to the possible effects on the financial statements
D) consider the adequacy of disclosure about the entity's possible inability to continue as a going concern

Accepted Answer

When an auditor concludes there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time, the auditor's responsibility is to consider the adequacy of disclosure about the entity's possible inability to continue as a going concern. The auditor should evaluate management's plans for dealing with the going concern issue and ensure that the financial statements include appropriate disclosures about the entity's financial condition and possible future uncertainties. While the auditor may also prepare prospective financial information or project future conditions and events, this is not the primary responsibility when there is doubt about an entity's ability to continue as a going concern. An adverse or qualified opinion may be issued if the financial statements do not include adequate disclosures.

Question 8

Management has decided that the life of a piece of heavy equipment should be decreased from 15 years to 10 years, thus increasing the annual amortization. The auditor agrees that this amortization period is more reflective of the nature of the asset. The type of audit report that should be issued is ________.
A) unqualified
B) qualified
C) adverse
D) disclaimer

Accepted Answer

The change in amortization period is a matter of accounting policy and not a departure from Generally Accepted Accounting Principles (GAAP). Additionally, the auditor agrees with the change. Therefore, an unqualified audit report is appropriate.

Question 9

By its silence, a clean opinion implies that the financial statement disclosures are reasonably adequate.

Accepted Answer

A clean opinion means that the financial statements are free from material misstatements and the disclosures are reasonably adequate. Therefore, the silence implies that the disclosures are reasonably adequate.

Question 10

In Canada, when there has been a change in accounting principles and the effect of the change has been properly disclosed, the auditor should ________.
A) refer to the change in an explanatory paragraph
B) explicitly concur that the change is preferred
C) issue an unqualified opinion
D) refer to the change in the opinion paragraph

Accepted Answer

When there has been a change in accounting principles and the effect of the change has been properly disclosed, the auditor should issue an unqualified opinion as long as the change is justified and the disclosure is adequate. Thus, the correct answer is C. Option A and D are not correct because referring to the change in an explanatory paragraph or the opinion paragraph respectively is not necessary if the change has been adequately disclosed. Option B is also not correct because the auditor should not express a preference for the change, the auditor's role is to ensure the change is justified and the disclosure is adequate, but not to express a preference for the change.

Question 11

Auditors cannot give negative assurance in an audit report.

Accepted Answer

The answer of Auditors cannot give negative assurance in an...

Question 12

In which of the following circumstances may the auditor issue the standard unqualified, unmodified audit report?
A) The client disclosed a change in accounting principles with an immaterial effect on financial position and results of operations.
B) The financial statements do not disclose significant going concern issues.
C) The financial statements do not disclose a justified departure from generally accepted accounting principles.
D) The auditor has not been able to audit a substantial portion of the balance sheet because of circumstances beyond anyone's control.

Accepted Answer

The answer of In which of the following circumstances may...

Question 13

Auditing standards require that an appropriate communication be issued in all cases where an accountant's name is associated with financial information.

Accepted Answer

This is correct according to auditing standards. The appropriate communication assures the reader of the financial information about the accountant's involvement and any limitations or restrictions on the scope of the work performed.

Question 14

An auditor decided to issue a qualified opinion on an entity's financial statements because a major inadequacy in its computerized accounting records prevented the auditor from applying necessary procedures. The opinion paragraph of the auditor's report should state that the qualification pertains to ________.
A) a GAAP departure
B) a departure from generally accepted auditing standards
C) the possible effect of the lack of audit evidence on the financial statements
D) inadequate disclosure of necessary information

Accepted Answer

The wording of the question suggests that the major inadequacy in the entity's computerized accounting records prevented the auditor from obtaining sufficient audit evidence to support the financial statements. Therefore, the qualification pertains to the possible effect of the lack of audit evidence on the financial statements. It is not a GAAP departure, a departure from generally accepted auditing standards, or inadequate disclosure of necessary information that led to the qualified opinion.

Question 15

An independent auditor must consider whether the auditee has the ability to continue as a going concern. If a substantial doubt exists but disclosure is adequate and no other basis exists for modifying the report, the auditor should ________.
A) disclaim an opinion.
B) express an adverse opinion.
C) qualify the opinion.
D) express an unqualified opinion.

Accepted Answer

If the auditor determines that there is a substantial doubt about the auditee's ability to continue as a going concern, but the information is properly disclosed and there are no other issues that require a modification of the report, the auditor may express an unqualified opinion with an emphasis of matter paragraph that discloses the auditor's concern about the going concern assumption. This is known as an unqualified opinion with an explanatory paragraph. Therefore, the best choice is to express an unqualified opinion.

Question 16

The term "financial statements" includes all of the footnote disclosures

Accepted Answer

Financial statements are a set of documents that provide information about the financial performance, position, and cash flows of an organization. These statements typically include the balance sheet, income statement, and statement of cash flows, as well as accompanying footnote disclosures that provide additional details and explanations. Therefore, the term "financial statements" includes all of the footnote disclosures.

Question 17

Which of the following auditing procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern?
A) Inspecting title documents to verify whether any assets are pledged as collateral.
B) Confirming with third parties the details of arrangements to maintain financial support.
C) Reconciling the cash balance per books with the cut-off bank statement and the bank confirmation.
D) Comparing the entity's amortization and asset capitalization policies to other entities in the industry.

Accepted Answer

Confirming with third parties the details of arrangements to maintain financial support would assist the auditor in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern. This is because if a third party is providing financial support, it may indicate that the entity is having difficulty financing its operations on its own.

Question 18

Moderate assurance is typical in the review report of audited financial statements.

Accepted Answer

Moderate assurance is typical in a review engagement, not an audit. An audit provides reasonable assurance, which is a higher level of assurance than a review.

Question 19

Under which of the following circumstances would a disclaimer of opinion be appropriate?
A) The client refuses to allow the auditor to review the minutes of the board of director's meetings.
B) The financial statements fail to contain adequate disclosure of related party transactions.
C) The auditor is engaged during the year and is unable to observe opening physical inventories which are material.
D) The auditor has identified illegal payments to foreign officials made by the client's management.

Accepted Answer

A disclaimer of opinion is appropriate when the auditor is unable to obtain sufficient appropriate audit evidence, such as when the client refuses access to important documents like board meeting minutes.

Question 20

An accountant becomes associated with financial statements when he or she signs them as the Chief Financial Officer.

Accepted Answer

An accountant becomes associated with financial statements primarily through the act of preparing, auditing, or reviewing them, not merely by signing them as the Chief Financial Officer (CFO). The CFO's signature typically represents management's responsibility for the financial statements, rather than the accountant's professional association with them.

Quiz 4: Reports on Audited Financial Statements

An auditor who is reporting on financial statements that contain a material departure from generally accepted accounting principles should include a separate explanatory paragraph and ________.

The words "except for" should be used in the scope paragraph only if there is a reservation resulting in a disclaimer of opinion or a scope qualification.

When independence is lacking, an audit in accordance with generally accepted accounting standards is still possible.

When the auditor is not independent, a GAAP departure qualification is required.

When a client will not permit inquiry of outside legal counsel, the audit report will ordinarily contain a(n) ________.

When an adverse opinion is given, all the substantive reasons for the opinion must be disclosed in the report in basis of modification explanatory paragraphs.

When an auditor concludes there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time, the auditor's responsibility is to ________.

By its silence, a clean opinion implies that the financial statement disclosures are reasonably adequate.

In Canada, when there has been a change in accounting principles and the effect of the change has been properly disclosed, the auditor should ________.

Auditors cannot give negative assurance in an audit report.

In which of the following circumstances may the auditor issue the standard unqualified, unmodified audit report?

Auditing standards require that an appropriate communication be issued in all cases where an accountant's name is associated with financial information.

An independent auditor must consider whether the auditee has the ability to continue as a going concern. If a substantial doubt exists but disclosure is adequate and no other basis exists for modifying the report, the auditor should ________.

The term "financial statements" includes all of the footnote disclosures

Which of the following auditing procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern?

Moderate assurance is typical in the review report of audited financial statements.

Under which of the following circumstances would a disclaimer of opinion be appropriate?

An accountant becomes associated with financial statements when he or she signs them as the Chief Financial Officer.