Question 1

Which of the following statements is not included in the Auditor's Responsibilities for the Audit of the Financial Statements Section of the standard (unmodified) report?
A)"In accordance with accounting principles generally accepted in the United States of America."
B)"Our objectives are to obtain reasonable assurance…and to issue an auditor's report that includes our opinion"
C)"…it is not a guarantee that an audit conducted in accordance with GAAS will always detect a material misstatement…"
D)"Reasonable assurance is a high level of assurance but is not absolute assurance…"

Accepted Answer

The statement "In accordance with accounting principles generally accepted in the United States of America" is actually included in the scope paragraph of the standard (unmodified) report, which describes the nature of the audit being conducted. The other statements listed are included in the Auditor's Responsibilities section, which describes the auditor's objectives and limitations.

Question 2

The auditors conclude that there is a material inconsistency in the "other information" in an annual report to shareholders containing audited financial statements. If the auditors conclude that the financial statements do not require revision, but the entity refuses to revise or eliminate the material inconsistency, the auditors may
A)issue a qualified opinion on the entity's financial statements, citing a departure from generally accepted accounting principles.
B)consider the matter closed since the other information is not included in the audited financial statements.
C)issue an adverse opinion on the entity's financial statements due to inadequate disclosure.
D)revise the report on the entity's financial statements to include an additional section describing the material inconsistency.

Accepted Answer

When auditors identify a material inconsistency in the "other information" of an annual report that doesn't affect the financial statements themselves, and the entity refuses to revise the inconsistency, the auditors may choose to revise their report to include a description of the material inconsistency. This action ensures that the users of the financial statements are aware of the inconsistency, without the auditors having to qualify their opinion on the financial statements themselves, which they still find to be presented fairly.

Question 3

When auditors qualify their opinion on the entity's financial statements because of inadequate disclosure, the auditors should describe the nature of the omission and modify
A)the Qualified Opinion Section only.
B)the Basis for Qualified Opinion Section only.
C)the Auditor's Responsibilities for the Audit of the Financial Statements Section only.
D)the Qualified Opinion Section and the Basis for Qualified Opinion Section.

Accepted Answer

When auditors qualify their opinion due to inadequate disclosure, they must modify both the Qualified Opinion Section and the Basis for Qualified Opinion Section to describe the nature of the omission. This is because the Qualified Opinion Section contains the auditor's opinion and the Basis for Qualified Opinion Section explains the reasons for the qualification. So, both sections should be modified to provide a clear explanation for the qualification.

Question 4

In which of the following circumstances may auditors issue the standard (unmodified) report on the entity's financial statements?
A)The entity changed accounting principles having an immaterial effect on the entity's financial position, results of operations, and cash flows.
B)The auditors wish to emphasize a matter regarding the financial statements.
C)The auditors reference component auditors who examined a subsidiary of group financial statements.
D)The auditors have not been able to audit a substantial portion of the balance sheet because of a circumstance-imposed scope limitation.

Accepted Answer

If the entity changed accounting principles but the effect was immaterial on the financial position, results of operations, and cash flows, auditors may issue an unmodified report. This is because the financial statements presented fairly, in all material respects the entity's financial position, results of operations, and cash flows in accordance with generally accepted accounting principles.

Question 5

In which of the following circumstances would a qualified opinion not be appropriate?
A)A scope limitation prevents the auditors from completing an important auditing procedure.
B)The entity has failed to properly disclose going-concern uncertainties.
C)An accounting principle at variance with generally accepted accounting principles is used.
D)The auditors lack independence with respect to the audited entity.

Accepted Answer

A qualified opinion may be appropriate in situations where there are departures from generally accepted accounting principles, scope limitations, and going-concern uncertainties. However, lack of independence is a significant violation of auditing standards and would result in a disclaimer of opinion, not a qualified opinion.

Question 6

Restrictions imposed by an entity prohibited the observation of physical inventories, which accounted for 35 percent of total assets. Alternative auditing procedures were not feasible, although the auditors were able to examine satisfactory evidence for all other items in the financial statements. The auditors would most likely express
A)a qualified opinion on the entity's financial statements, referring to a departure from generally accepted accounting principles.
B)a disclaimer of opinion on the entity's financial statements.
C)an unmodified opinion on the entity's financial statements with an other-matter paragraph.
D)an unmodified opinion on the entity's financial statements with a modification of the Auditor's Responsibilities for the Audit of the Financial Statements Section.

Accepted Answer

The inability to observe physical inventories and the lack of feasible alternative auditing procedures represent a scope limitation that is significant enough to render the auditors unable to obtain sufficient evidence to support their opinion on the financial statements. Therefore, a disclaimer of opinion is appropriate in this scenario.

Question 7

Which of the following situations would not result in auditors adding an emphasis-of-matter paragraph or section to their report without modifying the remainder of the report?
A)Reference to a change in the method of accounting mandated by the issuance of a new accounting standard.
B)Reference to a going-concern uncertainty facing the entity.
C)Reference to a departure from GAAP that is material, but not pervasive, to the financial statements.
D)Reference to an acquisition made by the entity during the most recent fiscal year.

Accepted Answer

A departure from GAAP that is material, but not pervasive, would typically result in a qualified opinion, which modifies the report, rather than just adding an emphasis-of-matter paragraph.

Question 8

A report that acknowledges reliance on the reports of component auditors is a type of report modification known as a(n)
A)qualification.
B)division of responsibility.
C)expansion of scope.
D)scope limitations.

Accepted Answer

A report that acknowledges reliance on the reports of component auditors is a type of report modification known as a division of responsibility. This is because the auditor is dividing the responsibility of the audit opinion with other auditors who have audited parts of the company's financial statements. The auditor is essentially stating that they are not solely responsible for the audit opinion but are relying on the work of other auditors.

Question 9

When auditors are engaged to examine an entity's financial statements but decide to issue a disclaimer of opinion because of a scope limitation, the report would not
A)identify management's responsibility for the financial statements.
B)refer to any scope limitation in the Basis for Opinion Section.
C)modify the Auditor's Responsibilities for the Audit of the Financial Statements Section to identify the basis for the disclaimer.
D)indicate that the auditors were engaged to audit the financial statements.

Accepted Answer

The disclaimer of opinion report is issued when the auditor has enough evidence to form an opinion on the financial statements. However, the auditor believes that the scope limitation is material to the financial statements and prevents the auditor from expressing an opinion on the financial statements. The auditor's responsibility is to express an opinion on the financial statements, and if the auditor cannot do so, the auditor must issue a disclaimer of opinion report.

Question 10

Which of the following scope limitations would ordinarily be of most concern to the auditors?
A)The inability to observe inventories because auditors were appointed following the date of the financial statements.
B)Management's refusal to provide auditors with written representations.
C)The inability to obtain confirmation of year-end balances from customers because of different billing dates.
D)The use of the work of component auditors in the audit of group financial statements.

Accepted Answer

When management refuses to provide written representations, auditors are unable to obtain explicit and direct evidence about the completeness, accuracy, and validity of management's assertions. This could result in significant risks and material misstatements going undetected. The other scope limitations listed may also present challenges, but management's refusal to provide written representations is generally considered the most serious.

Question 11

Auditors should disclose the substantive reasons for expressing an adverse opinion on the entity's financial statements in
A)the Adverse Opinion Section.
B)the Basis for Adverse Opinion Section.
C)the Auditor's Responsibilities for the Audit of the Financial Statements Section.
D)the footnotes to the financial statements.

Accepted Answer

The Basis for Adverse Opinion section is where the auditor should disclose the substantive reasons for expressing an adverse opinion on the entity's financial statements. This section explains why the financial statements are materially misstated and the specific reasons for the adverse opinion. The other sections listed do not specifically address the disclosure of reasons for an adverse opinion.

Question 12

Which of the following statements is not included in the Basis for Opinion Section of the standard (unmodified) report on the entity's financial statements?
A)"We are required to communicate with those charged with governance…"
B)"We are required to be independent of [the client]…"
C)"We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion."
D)"We conducted our audit in accordance with…(GAAS)"

Accepted Answer

The requirement to communicate with those charged with governance is included in the Responsibilities of Auditor and Management Section of the standard report, not in the Basis for Opinion Section.

Question 13

If financial statements contain a material but non-pervasive departure from generally accepted accounting principles, the auditors should render a(n)
A)Qualified opinion with reference to departure.
B)adverse opinion with scope limitation reference.
C)adverse opinion with reference to departure.
D)disclaimer of opinion.

Accepted Answer

A material but non-pervasive departure from generally accepted accounting principles would require the auditors to provide a qualified opinion with reference to the departure. This means that the financial statements are fairly presented overall, but there is a specific issue that needs to be disclosed to the users of the financial statements. An adverse opinion is given when the financial statements are not fairly presented overall, while a disclaimer of opinion is given when the auditors cannot obtain sufficient evidence to form an opinion. A scope limitation reference is given when the auditors were unable to perform certain audit procedures due to limitations outside of their control.

Question 14

Auditors will issue an adverse opinion when
A)a severe scope limitation has been imposed by the entity.
B)a violation of generally accepted accounting principles is sufficiently material and pervasive that a qualified opinion is not justified.
C)a qualified opinion cannot be rendered because the auditors lack independence.
D)the entity's ability to continue as a going concern is subject to substantial doubt.

Accepted Answer

An adverse opinion is issued when there is a violation of generally accepted accounting principles that is sufficiently material and pervasive that a qualified opinion is not justified. A severe scope limitation would result in a disclaimer of opinion, lack of independence would result in a qualified opinion, and substantial doubt about the entity's ability to continue as a going concern would result in either a qualified opinion or an explanatory paragraph added to the opinion.

Question 15

When an entity will not permit inquiry of outside legal counsel, the auditors' report on the entity's financial statements will ordinarily contain a(n)
A)disclaimer of opinion.
B)qualified opinion referencing a departure from generally accepted accounting principles.
C)unmodified opinion with an emphasis-of-matter paragraph.
D)adverse opinion.

Accepted Answer

If an entity does not allow inquiry of outside legal counsel, the auditors will face a limitation of scope which will prevent them from obtaining sufficient audit evidence. As a result, the auditors will issue a disclaimer of opinion.

Question 16

The auditors' report on the entity's financial statements included language disclosing a difference of opinion between the auditors and the entity for which the auditors believed an adjustment to the financial statements should be made. The Opinion Section of the auditors' report should express a(n)
A)unmodified opinion.
B)qualified opinion citing a departure from generally accepted accounting principles.
C)qualified opinion citing a scope limitation and lack of specific evidence.
D)disclaimer of opinion.

Accepted Answer

A qualified opinion citing a departure from generally accepted accounting principles is appropriate when auditors believe an adjustment should be made to the financial statements due to a disagreement with the entity, indicating that the financial statements may not be fully in accordance with GAAP.

Question 17

"As described in Note 5 to the financial statements, General Express changed its statistical method of computing product warranty expense for the year ended December 31, 20x1…" is an illustration of a
A)consistency change requiring a qualified opinion.
B)scope limitation.
C)departure from generally accepted accounting principles.
D)report with a consistency modification.

Accepted Answer

The statement describes a change in an accounting policy that affects the consistency of the financial statements. A consistency modification is required when there is a change in an accounting principle or an estimation method that affects the comparability of financial statements. Therefore, a report with a consistency modification is needed, not a qualified opinion, scope limitation or departure from generally accepted accounting principles.

Question 18

Auditors are required to reference consistency in their report when there are changes in
A)accounting estimates.
B)the format of the Statement of Cash Flows.
C)the classification of financial statement amounts.
D)accounting principles.

Accepted Answer

Auditors are required to reference consistency in their report when there are changes in accounting principles. A change in accounting principle refers to a change from one generally accepted accounting principle to another. The auditor needs to evaluate the impact of the change on the financial statements and disclose it in their report. However, changes in accounting estimates, the format of the Statement of Cash Flows, and the classification of financial statement amounts do not require a reference to consistency in the auditor's report.

Question 19

The issuance of a disclaimer of opinion generally indicates
A)the auditors cannot form an opinion on the fairness of presentation of the financial statements as a whole.
B)the auditors have some uncertainties, but these uncertainties are not so material that they cannot form an opinion on the fairness of presentation of the financial statements as a whole.
C)the auditors have observed a departure from generally accepted accounting principles but the departure is not of sufficient materiality to justify a qualified opinion.
D)the auditors have observed a departure from generally accepted accounting principles that is so material and pervasive that a qualified opinion is not justified.

Accepted Answer

A disclaimer of opinion is issued by auditors when they are unable to form an opinion on the fairness of presentation of the financial statements as a whole. This could happen due to various reasons such as lack of sufficient evidence or limitations on the scope of the audit. It indicates a high level of uncertainty and lack of confidence in the financial statements.

Question 20

When auditors lack independence, which of the following is true about the report on the entity's financial statements that should be issued?
A)The auditors should disclaim an opinion and should state specifically that they are not independent.
B)The auditors should disclaim an opinion but not mention that they are not independent.
C)The auditors should issue an unmodified opinion with an other-matter paragraph stating that they are not independent.
D)The auditors should issue a qualified opinion with an other-matter paragraph stating that they are not independent.

Accepted Answer

When auditors lack independence, they cannot issue an unmodified, qualified, or adverse opinion on the financial statements. Instead, they should disclaim an opinion and specifically state that they are not independent. This is required to provide transparency and clarity to the users of the financial statements.

Quiz 12: Reports on Audited Financial Statements

Which of the following statements is not included in the Auditor's Responsibilities for the Audit of the Financial Statements Section of the standard (unmodified) report?

When auditors qualify their opinion on the entity's financial statements because of inadequate disclosure, the auditors should describe the nature of the omission and modify

In which of the following circumstances may auditors issue the standard (unmodified) report on the entity's financial statements?

In which of the following circumstances would a qualified opinion not be appropriate?

Which of the following situations would not result in auditors adding an emphasis-of-matter paragraph or section to their report without modifying the remainder of the report?

A report that acknowledges reliance on the reports of component auditors is a type of report modification known as a(n)

When auditors are engaged to examine an entity's financial statements but decide to issue a disclaimer of opinion because of a scope limitation, the report would not

Which of the following scope limitations would ordinarily be of most concern to the auditors?

Auditors should disclose the substantive reasons for expressing an adverse opinion on the entity's financial statements in

Which of the following statements is not included in the Basis for Opinion Section of the standard (unmodified) report on the entity's financial statements?

If financial statements contain a material but non-pervasive departure from generally accepted accounting principles, the auditors should render a(n)

Auditors will issue an adverse opinion when

When an entity will not permit inquiry of outside legal counsel, the auditors' report on the entity's financial statements will ordinarily contain a(n)

"As described in Note 5 to the financial statements, General Express changed its statistical method of computing product warranty expense for the year ended December 31, 20x1…" is an illustration of a

Auditors are required to reference consistency in their report when there are changes in

The issuance of a disclaimer of opinion generally indicates

When auditors lack independence, which of the following is true about the report on the entity's financial statements that should be issued?