Question 1

When an auditor expresses an adverse opinion, the opinion paragraph should include:

Accepted Answer

When an auditor expresses an adverse opinion, the opinion paragraph should include a direct reference to a separate paragraph in the auditor's report disclosing the basis for the opinion. This separate paragraph should describe the nature and extent of the departure from generally accepted accounting principles and the reasons why the financial statements are materially misstated.

Question 2

When a client declines to include a statement of cash flows in its financial report, the auditor's report will usually:

Accepted Answer

The statement of cash flows is a required financial statement under GAAP, and its omission represents a material departure from GAAP. As a result, the auditor would typically issue either a qualified or adverse opinion due to the inadequate disclosure. A qualified opinion may be issued if the auditor determines that the financial statements taken as a whole are fairly presented except for the matter related to the statement of cash flows. An adverse opinion may be issued if the omission of the statement of cash flows creates a pervasive departure from GAAP that undermines the usefulness of the financial statements.

Question 3

When an adverse opinion is expressed, the opinion paragraph should include a direct reference to:

Accepted Answer

When an adverse opinion is expressed, the auditor should include a separate qualification paragraph that discusses the basis for the opinion rendered. This paragraph should explain the reasons why the auditor has reached an adverse opinion and reference the specific financial statement items that are affected. It should also provide a description of the financial reporting framework that was used and the reasons for the departure from that framework.

Question 4

Huggins Ltd is required to but does not wish to prepare and issue a statement of cash flows as part of its financial report. In these circumstances, the auditor's report should include:

Accepted Answer

The auditor is required to express an adverse opinion as the omission of the statement of cash flows violates a fundamental accounting principle and the financial report is incomplete without it.

Question 5

Your client has followed approved accounting standards but a note to the financial report indicates that the application of certain standards results in the financial report being materially misstated. The note details the reasons for this view.You do not concur with this view. What type of opinion should you issue?

Accepted Answer

The answer of Your client has followed approved accounting standards...

Question 6

An auditor was unable to obtain an audited financial report or other evidence supporting an entity's investment in a foreign subsidiary considered material to the financial report. Between which of the following opinions
Should the entity's auditor choose?

Accepted Answer

A qualified opinion is appropriate when there is a limitation on the scope of the audit, which is the case here due to the inability to obtain appropriate evidence. A disclaimer of opinion is appropriate when there is a significant limitation on the scope of the audit that prevents the auditor from forming an opinion. In this case, the inability to obtain evidence regarding a material investment in a foreign subsidiary is a significant limitation on the scope of the audit, hence a disclaimer of opinion is also necessary. Therefore, the best choice is A) Qualified and disclaimer.

Question 7

If an entity's external auditor expresses an unmodified opinion as a result of the audit of the entity's financial report, readers of the auditor's report can assume that:

Accepted Answer

An unmodified opinion indicates that any material disagreements regarding the application of accounting principles were resolved to the auditor's satisfaction, ensuring the financial statements are presented fairly in all material respects according to the applicable financial reporting framework. It does not guarantee the entity's financial soundness, the absence of any irregularities, or the effectiveness of internal controls.

Question 8

If the auditor believes that there is minimal likelihood that resolution of an uncertainty will have a material effect on the financial report, the auditor would issue a(n):

Accepted Answer

If the auditor believes that there is minimal likelihood that an uncertainty will have a material effect on the financial report, then they can issue an unmodified (or "clean") opinion. This means that the auditor believes the financial report is fairly presented in accordance with accounting standards and there are no material misstatements.

Question 9

Taylor Ltd has disclosed the fact that they are being sued for $1 million. Taylor Ltd reported a profit for the year of $10 million and has total assets of $15 million. You conclude that disclosure of the litigation is adequate. What
Type of opinion should you express on the financial report of Taylor Ltd?

Accepted Answer

The disclosure of the litigation for $1 million is material but not pervasive to Taylor Ltd's financial statements. Therefore, an unmodified opinion can still be given. However, an emphasis of matter paragraph should be included in the auditor's report to draw attention to the litigation. This would result in an unmodified opinion with an emphasis of matter.

Question 10

A solicitor limits a response concerning a litigation claim because the solicitor is unable to determine the likelihood of an unfavourable outcome. Which type of opinion should the auditor express if the litigation is adequately disclosed
And the range of potential loss is material in relation to the client's financial report considered as a whole?

Accepted Answer

An Emphasis of Matter paragraph is used to highlight a matter that is appropriately presented or disclosed in the financial statements but is of such importance that it is fundamental to users' understanding of the financial statements. In this case, the litigation is adequately disclosed, and the range of potential loss is material, so an Emphasis of Matter paragraph is appropriate.

Question 11

The basic elements of the auditor's standard report for a Corporations Act 2001 audit include all of the following except:

Accepted Answer

All of the other elements listed (title that includes the word 'independent', statement that the financial report is the responsibility of the company's directors, statement that an audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial report) are required elements of the auditor's standard report for a Corporations Act 2001 audit. However, a statement about accounting estimates is not specifically required, although the auditor may choose to include one if they deem it necessary.

Question 12

For a Corporations Act 2001 audit, the auditor has reporting obligations to:

Accepted Answer

The auditor has reporting obligations to management and the board of directors, the governing body and members, and ASIC.

Question 13

Your client, Blunt Ltd, is being sued by one of its competitors for $20 million for an alleged patent infringement.Your client has assets of $40 million and a reported profit of $10 million. The client has disclosed the lawsuit in a note to the accounts along with a statement indicating that they intend to vigorously defend the suit and are
Confident of winning the suit. Your independent legal advice supports this view and you are satisfied with the
Details provided by the client in the notes to the accounts. What type of opinion should you express on the
Financial report of Blunt Ltd?

Accepted Answer

The answer of Your client, Blunt Ltd, is being sued...

Question 14

When restrictions are imposed by the client, which significantly limit the auditor's ability to audit fixed assets (a material part of the balance sheet), the auditor generally should issue which of the following opinions?

Accepted Answer

A qualified opinion is issued when the auditor has obtained sufficient appropriate evidence to form an opinion on the financial statements, but there is a material uncertainty or limitation on the scope of the audit. In this case, the restrictions imposed by the client significantly limit the auditor's ability to audit fixed assets, which is a material part of the balance sheet. Therefore, the auditor would issue a qualified opinion.

Question 15

For the purposes of the approved auditing standards, what are the differences, if any, between the phrases 'true and fair view' and 'presents fairly, in all material respects'?

Accepted Answer

The two phrases are equivalent in meaning and use in the context of auditing standards. Both indicate that financial statements present information accurately and honestly and that material inaccuracies have not been identified during the audit process.

Question 16

An auditor would issue an adverse opinion if:

Accepted Answer

An adverse opinion is issued when the financial statements taken as a whole do not fairly present the financial condition and results of operations of the entity. This means that there are material misstatements in the financial statements that are so significant that it undermines the overall accuracy and fairness of the financial information. This is the most serious type of audit opinion and indicates that the financial statements are not reliable.

Question 17

Certain circumstances, while not affecting the auditor's opinion on the financial report, may require the auditor to add an Emphasis of Matter paragraph to the report. These circumstances include all of the following except where:

Accepted Answer

An Emphasis of Matter paragraph is used to draw attention to a matter that is adequately disclosed in the financial statements. If there is a significant uncertainty that is not adequately disclosed, this would typically result in a modification of the auditor's opinion, not just an Emphasis of Matter paragraph.

Question 18

Your client has followed approved accounting standards but a note to the financial report indicates the early application of an accounting standard that has a pervasive effect on the financial report in advance of its effective date. The note details the reasons for this view. You, as the auditor, concur that this additional note disclosure is necessary to give a true and fair value. What type of opinion should you issue?

Accepted Answer

An unmodified opinion with an Emphasis of Matter is appropriate in this scenario, as the client has followed approved accounting standards and the auditor concurs that additional disclosure is necessary to give a true and fair value. The Emphasis of Matter paragraph would highlight the note to the financial report regarding the early adoption of the accounting standard, explaining the reasons for this view. This opinion indicates that the financial statements are presented fairly in all material respects, with the additional note disclosure necessary for a clear understanding of the financial position.

Question 19

Which of the following statements are true for fair presentation frameworks? A fair presentation framework:

Accepted Answer

The answer of Which of the following statements are true...

Question 20

The auditor is unable to reach a conclusion as to the reasonableness of management's representations. The auditor will have to consider issuing a(n):

Accepted Answer

If the auditor is unable to reach a conclusion on the reasonableness of management's representations, they cannot issue an unqualified opinion. Instead, they may issue a qualified opinion or a disclaimer of opinion. A qualified opinion may be issued if the auditor believes that the financial statements are fairly presented except for a specific departure from GAAP or a limitation on the scope of the audit. A disclaimer of opinion may be issued if the auditor is unable to obtain sufficient appropriate evidence or there is a significant scope limitation.

Quiz 13: The Auditors Reporting Obligations Part Five: Other Assurance Services