Question 1

When audited financial statements are presented in a document containing other information,the auditors should
A) Perform inquiry and analytical procedures to ascertain whether the other information is reasonable.
B) Add an explanatory paragraph to the auditors' report without modifying the opinion on the financial statements.
C) Perform the appropriate substantive procedures to corroborate the other information.
D) Read the other information to determine that it is consistent with the audited financial statements.

Accepted Answer

Auditors are required to read the other information to ensure it is consistent with the audited financial statements, but they are not required to perform additional procedures unless inconsistencies are found.

Question 2

Charlie Company's comparative financial statements include the financial statements of the prior year that were audited by predecessor auditors whose report on those financial statements is not presented.If the predecessor's report was qualified,the successor auditors should
A) Indicate in their report the substantive reasons for the qualification issued by the predecessor auditors.
B) Request the entity to reissue the predecessor's report on the prior-year statements.
C) Issue an updated comparative report on the entity's financial statements, indicating the division of responsibility.
D) Express an opinion only on the current-year financial statements and make no reference to the prior-year financial statements or opinion.

Accepted Answer

If predecessor auditors issued a qualified report, the successor auditors should indicate in their report the substantive reasons for the qualification issued by the predecessor auditors. This is required by Auditing Standard No. 310, which states that the successor auditor's report should indicate whether the financial statements of the prior period were audited by a predecessor auditor and discuss the nature of any significant reservations expressed by the predecessor auditor.

Question 3

In which of the following situations would auditors ordinarily choose between expressing a qualified opinion or an adverse opinion on the entity's financial statements?
A) The auditors did not observe the entity's physical inventory and are unable to become satisfied as to its balance by other auditing procedures.
B) The financial statements fail to disclose information that is required by generally accepted accounting principles.
C) The auditors are asked to report only on the entity's balance sheet but not on the other basic financial statements.
D) Events disclosed in the financial statements cause the auditors to have substantial doubt about the entity's ability to continue as a going concern.

Accepted Answer

When financial statements fail to disclose information required by GAAP, auditors must decide between a qualified opinion (if the omission is not pervasive) or an adverse opinion (if the omission is pervasive and misleading).

Question 4

Which of the following is an example of a material accounting change that requires recognition in an unqualified opinion on the entity's financial statements?
A) A change in the estimate of useful lives used to depreciate property, plant and equipment.
B) A change in the entity's form of reporting entity.
C) Management has changed from one generally accepted accounting principle to another but has not provided reasonable justification.
D) A change from an accounting principle that conforms with GAAP to one that does not.

Accepted Answer

A change in the entity's form of reporting entity is considered a material accounting change that requires recognition in an unqualified opinion on the entity's financial statements. This is because it can significantly affect how the financial statements are presented and interpreted, impacting comparability over time.

Question 5

In which of the following circumstances would auditors be most likely to express an adverse opinion?
A) The chief executive officer refuses to provide the auditors access to minutes of the board of directors' meetings.
B) Tests of controls show that the entity's internal control is so ineffective that it cannot be relied upon.
C) The financial statements are not in conformity with generally accepted accounting principles regarding the capitalization of leases.
D) Information comes to the auditors' attention that raises substantial doubt about the entity's ability to continue as a going concern.

Accepted Answer

An adverse opinion is issued when the financial statements are materially misstated and not presented in conformity with generally accepted accounting principles. If the financial statements are not in conformity with GAAP regarding a significant issue such as the capitalization of leases, auditors would express an adverse opinion on the financial statements. Choice A pertains to a lack of access to information, which would result in auditors issuing a qualified or disclaimer of opinion rather than an adverse opinion. Choice B would result in a qualified opinion as the financial statements may be misstated but not to the extent that they cannot be relied upon. Choice D pertains to uncertainty about the entity's ability to continue as a going concern, which would result in a qualified opinion rather than an adverse opinion unless the effects are pervasive.

Question 6

If management fails to provide adequate justification for a change from one generally accepted accounting principle to another,the auditors should
A) Add an additional paragraph and express a qualified or an adverse opinion on the entity's financial statements for lack of conformity with generally accepted accounting principles.
B) Disclaim an opinion on the entity's financial statements because of uncertainty.
C) Disclose the matter in a separate explanatory paragraph but not modify the opinion paragraph on the entity's financial statements.
D) Neither modify the opinion on the entity's financial statements nor disclose the matter because both principles are generally accepted accounting principles.

Accepted Answer

If management fails to provide adequate justification for a change from one generally accepted accounting principle to another, the auditors should express a qualified or an adverse opinion on the entity's financial statements for lack of conformity with generally accepted accounting principles. This is because the failure to justify the change implies a departure from GAAP, which requires auditors to modify their opinion on the financial statements.

Question 7

When there has been a change in accounting principles but its effect on the comparability of the financial statements is not material,the auditors should
A) Refer to the change in an explanatory paragraph.
B) Explicitly concur that the change is preferred.
C) Not refer to consistency in the report.
D) Refer to the change in the opinion paragraph.

Accepted Answer

When there has been a change in accounting principles, but it does not have a material effect on the comparability of the financial statements, the auditors should not refer to consistency in the report. This is because consistency is not affected, and therefore, there is no need to make any reference to it. Referring to the change in an explanatory paragraph or the opinion paragraph, or explicitly concurring that the change is preferred would not be necessary, as it does not have any material impact on the comparability of the financial statements. The auditors can still express an unmodified opinion on the financial statements without referring to the change.

Question 8

In which of the following circumstances would auditors most likely add an explanatory paragraph to the standard report without affecting the unqualified opinion on the entity's financial statements?
A) The auditors are asked to report on the balance sheet but not on the other basic financial statements.
B) There is substantial doubt about the entity's ability to continue as a going concern.
C) Management's estimates of the effects of future events on the entity's financial condition, results of operations, and cash flows are unreasonable.
D) Certain transactions cannot be tested because of management's records retention policy.

Accepted Answer

If there is substantial doubt about the entity's ability to continue as a going concern, auditors may add an explanatory paragraph to the standard report stating that there is doubt about the entity's ability to continue as a going concern. This does not affect the unqualified opinion on the financial statements. However, this paragraph must be included for the report to be in accordance with generally accepted auditing standards (GAAS).

Question 9

Reference in a group auditors' report to the fact that part of the audit of group financial statements was performed by component auditors most likely would be an indication of
A) Division of responsibility between the auditors who conducted the audits of the components of the group financial statements.
B) The portion of the group statements audited by the component auditors not being considered material.
C) Group auditors' recognition of the component auditors' competence, reputation, and professional certification.
D) Different opinions the auditors are expressing on the components of the financial statements that each audited.

Accepted Answer

Reference to component auditors in the group auditors' report indicates that there was a division of responsibility between the auditors who conducted the audits of the components of the group financial statements. This is typically done when the group auditors have relied on the work of component auditors to audit portions of the group financial statements. The reference to component auditors does not necessarily imply anything about materiality, recognition of competence, reputation, or professional certification, or different opinions on the financial statements.

Question 10

The auditors include a separate paragraph in an otherwise unmodified report on the entity's financial statements to emphasize that the entity being reported on had significant transactions with related parties.The inclusion of this separate paragraph
A) Is considered a qualification of the opinion.
B) Violates generally accepted auditing standards if this information is already disclosed in footnotes to the financial statements.
C) Necessitates a revision of the opinion paragraph to include the phrase "with the foregoing explanation."
D) Is appropriate and would not otherwise affect the unqualified opinion.

Accepted Answer

The inclusion of a separate paragraph to emphasize significant transactions with related parties is not a qualification of the opinion, as long as the auditors conclude that the financial statements are fairly presented. It is also not a violation of GAAS if the disclosure is not sufficiently prominent in the footnotes. The opinion paragraph does not need to be revised with the phrase "with the foregoing explanation" as this is only required when the auditors modify or qualify the opinion.

Question 11

Auditors most likely would issue a disclaimer of opinion on the entity's financial statements because of
A) Inadequate disclosure of material information.
B) The omission of the statement of cash flows.
C) A material departure from generally accepted accounting principles.
D) Management's refusal to furnish written representations.

Accepted Answer

A disclaimer of opinion is issued when auditors are unable to obtain sufficient appropriate audit evidence, which can occur if management refuses to provide necessary written representations.

Question 12

The auditors conclude that an entity's illegal act,which has a material effect on the financial statements,has not been properly accounted for or disclosed.Depending on the overall materiality and pervasiveness of the effect of this illegal act on the financial statements,the auditors should express either a(n)
A) Adverse opinion or a disclaimer of opinion.
B) Qualified opinion or adverse opinion.
C) Disclaimer of opinion or an unqualified opinion with a separate explanatory paragraph.
D) Unqualified opinion with a separate explanatory paragraph or a qualified opinion.

Accepted Answer

If an illegal act has a material effect on the financial statements and is not properly accounted for or disclosed, auditors should express a qualified opinion if the effect is material but not pervasive, or an adverse opinion if the effect is both material and pervasive.

Question 13

Independent auditors must consider whether the entity 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 auditors would normally
A) Disclaim an opinion.
B) Express an adverse opinion.
C) Qualify the opinion.
D) Express an unqualified opinion with an additional paragraph describing the going-concern uncertainty.

Accepted Answer

If the auditors believe that there is a substantial doubt about the entity's ability to continue as a going concern, they should express an unqualified opinion with an additional paragraph describing the uncertainty. This is known as an emphasis of matter paragraph, and it would disclose the auditors' concerns about the entity's ability to continue as a going concern. If the auditors believe that disclosure is adequate and no other basis exists for modifying the report, then the best choice would be to express an unqualified opinion with an emphasis of matter paragraph.

Question 14

Under which of the following circumstances would a disclaimer of opinion on the entity's financial statements not be appropriate?
A) The financial statements fail to contain adequate disclosure of related-party transactions.
B) The entity refuses to permit its attorney to furnish information requested in an attorney letter.
C) The auditors are engaged after the date of the financial statements and are unable to observe physical inventories or apply alternative procedures to verify their balances.
D) The auditors are unable to determine the amounts associated with illegal acts committed by the entity's management.

Accepted Answer

A disclaimer of opinion is not appropriate when the financial statements fail to contain adequate disclosure of related-party transactions because the auditor can issue a qualified opinion or an adverse opinion depending on the materiality and pervasiveness of the lack of disclosure. Disclaimers are typically issued when the auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, which is more aligned with scenarios B, C, and D.

Question 15

When disclaiming an opinion due to a client-imposed scope limitation,auditors should indicate in a separate paragraph why the audit did not comply with the standards of the PCAOB.The auditors should also omit
A) The opinion paragraph.
B) The scope and opinion paragraph.
C) Neither the scope or opinion paragraph
D) The scope paragraph.

Accepted Answer

The answer of When disclaiming an opinion due to a...

Question 16

C.Green,CPA,was engaged to audit the financial statements of Essex Co.after its fiscal year had ended.The timing of Green's appointment and the start of fieldwork made confirming accounts receivable by direct communication with the customers not feasible.However,Green applied other procedures and was satisfied as to the reasonableness of the account balances.Green's auditors' report most likely contained a(n)
A) Unqualified opinion.
B) Unqualified opinion with an explanatory paragraph.
C) Qualified opinion due to a scope limitation.
D) Qualified opinion due to a departure from generally accepted auditing standards.

Accepted Answer

Since Green was able to apply alternative procedures to confirm the reasonableness of account balances, there was no scope limitation or departure from auditing standards necessary to qualify their opinion, and no additional explanation was required. Therefore, the auditors' report most likely contained an unqualified opinion.

Question 17

Which of the following phrases would auditors most likely include in their report when expressing a qualified opinion on the entity's financial statements because of inadequate disclosure?
A) "Subject to the departure from generally accepted accounting principles, as described above."
B) "With the foregoing explanation of these omitted disclosures."
C) "Except for the omission of the information discussed in the preceding paragraph."
D) "Does not present fairly in all material respects."

Accepted Answer

This phrase indicates that everything in the financial statements is fine except for the inadequate disclosure, which is described in the preceding paragraph. The other options either refer to a departure from accounting principles (A), a specific explanation of omitted disclosures (B), or a general statement that the financial statements do not present fairly (D).

Question 18

Auditors who are reporting on financial statements that contain a material departure from generally accepted accounting principles should include an additional 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) Disclaim an opinion on the financial statements.
D) Express a qualified opinion or disclaimer of opinion.

Accepted Answer

The answer of Auditors who are reporting on financial statements...

Question 19

Auditors would not normally issue a qualified opinion on the entity's financial statements when
A) An accounting principle at variance with generally accepted accounting principles is used.
B) The auditors lack independence with respect to the audited entity.
C) A scope limitation prevents the auditors from completing an important auditing procedure.
D) The entity has undertaken a change in accounting principle with which the auditor does not agree.

Accepted Answer

The lack of independence of the auditors with respect to the audited entity is a fundamental issue that would result in a disclaimer of opinion rather than a qualified opinion. Qualified opinions are issued when the auditors have concerns about specific items in the financial statements or when a scope limitation prevents them from obtaining sufficient evidence. The use of an accounting principle at variance with generally accepted accounting principles, or a change in accounting principle with which the auditor disagrees, may result in a qualified opinion if the impact on the financial statements is material and pervasive. However, the specific circumstances would need to be evaluated in each case.

Question 20

When financial statements contain a departure from GAAP because of unusual circumstances and the statements would otherwise be misleading,the auditors should explain the unusual circumstances in a separate paragraph and express an opinion that is
A) Unqualified.
B) Qualified.
C) Adverse.
D) Qualified or adverse, depending on the overall materiality and pervasiveness of the GAAP departure.

Accepted Answer

When financial statements contain a departure from GAAP due to unusual circumstances, auditors can issue an unqualified opinion if they believe the departure is justified and necessary to prevent the statements from being misleading. The auditors must explain the circumstances in a separate paragraph.

Quiz 12: Reports on Audited Financial Statements

When audited financial statements are presented in a document containing other information,the auditors should

Charlie Company's comparative financial statements include the financial statements of the prior year that were audited by predecessor auditors whose report on those financial statements is not presented.If the predecessor's report was qualified,the successor auditors should

In which of the following situations would auditors ordinarily choose between expressing a qualified opinion or an adverse opinion on the entity's financial statements?

Which of the following is an example of a material accounting change that requires recognition in an unqualified opinion on the entity's financial statements?

In which of the following circumstances would auditors be most likely to express an adverse opinion?

If management fails to provide adequate justification for a change from one generally accepted accounting principle to another,the auditors should

When there has been a change in accounting principles but its effect on the comparability of the financial statements is not material,the auditors should

In which of the following circumstances would auditors most likely add an explanatory paragraph to the standard report without affecting the unqualified opinion on the entity's financial statements?

Reference in a group auditors' report to the fact that part of the audit of group financial statements was performed by component auditors most likely would be an indication of

The auditors include a separate paragraph in an otherwise unmodified report on the entity's financial statements to emphasize that the entity being reported on had significant transactions with related parties.The inclusion of this separate paragraph

Auditors most likely would issue a disclaimer of opinion on the entity's financial statements because of

Independent auditors must consider whether the entity 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 auditors would normally

Under which of the following circumstances would a disclaimer of opinion on the entity's financial statements not be appropriate?

When disclaiming an opinion due to a client-imposed scope limitation,auditors should indicate in a separate paragraph why the audit did not comply with the standards of the PCAOB.The auditors should also omit

Which of the following phrases would auditors most likely include in their report when expressing a qualified opinion on the entity's financial statements because of inadequate disclosure?

Auditors who are reporting on financial statements that contain a material departure from generally accepted accounting principles should include an additional paragraph and

Auditors would not normally issue a qualified opinion on the entity's financial statements when

When financial statements contain a departure from GAAP because of unusual circumstances and the statements would otherwise be misleading,the auditors should explain the unusual circumstances in a separate paragraph and express an opinion that is