Question 1

A basic assumption that underlies financial reporting is that an entity will continue as a going concern.

Accepted Answer

The assumption of continuity or going concern is a fundamental principle of financial reporting, stating that an entity will continue to operate in the foreseeable future. It allows for the preparation of financial statements that reflect the entity's financial performance and position accurately.

Question 2

An auditor must disclaim an opinion when the auditor lacks independence.

Accepted Answer

According to the Generally Accepted Auditing Standards (GAAS), an auditor must disclaim an opinion when the auditor lacks independence, as independence is crucial to maintain the integrity of the audit process and the reliability of the auditor's report.

Question 3

A change in reporting entity is an example of an accounting change that affects comparability and requires an explanatory/emphasis-of-matter paragraph in the audit report.

Accepted Answer

A change in reporting entity could affect the comparability of financial statements and therefore requires an explanatory or emphasis-of-matter paragraph in the audit report to provide context and transparency to the users of the financial statements.

Question 4

A going concern issue requires a modification of the three-paragraph standard unqualified audit report (public company).

Accepted Answer

If a going concern issue exists, the standard unqualified audit report must be modified to include an emphasis of matter paragraph that discusses the uncertainty and management's plans to address it.

Question 5

If the principal auditor decides to make reference to the other auditor's examination, the introductory paragraph must specifically indicate the
A) The portion of the financial statements examined by the other auditor.
B) Name of the other auditor.
C) Name of the consolidated subsidiary examined by the other auditor.
D) Type of opinion expressed by the other auditor.

Accepted Answer

The introductory paragraph should indicate the portion of the financial statements examined by the other auditor to clarify the scope of the principal auditor's responsibility.

Question 6

Management believes and the auditor is satisfied, that a material loss probably will occur when pending litigation is resolved. Management is unable to make a reasonable estimate of the amount or range of the potential loss, but fully discloses the situation in the notes to the financial statements. If the auditor wishes to call attention to the matter and management does not make an accrual in the financial statements, the auditor should issue a(an)
A) Qualified report due to a scope limitation.
B) Qualified report due to a departure from GAAP.
C) Unqualified/unmodified report with an explanatory/emphasis-of-matter paragraph.
D) Unqualified/unmodified report in a standard auditor's report.

Accepted Answer

The situation described is a material uncertainty that requires disclosure in the financial statements. However, since management cannot estimate the potential loss and does not make an accrual, the auditor may want to draw further attention to the matter by including an explanatory or emphasis-of-matter paragraph in an unqualified/unmodified report. This indicates that the financial statements are fairly presented, but there is additional information that users should be aware of. A qualified report is not required since there is no departure from GAAP, and a scope limitation is not applicable in this scenario.

Question 7

A change in accounting estimate is an example of an accounting change that affects comparability and requires an explanatory/emphasis-of-matter paragraph in the audit report.

Accepted Answer

The answer of A change in accounting estimate is an...

Question 8

If the auditor believes that there is minimal likelihood that resolution of an uncertainty will have a material effect on the financial statements, the auditor would issue a(n)
A) "Except for" opinion.
B) Adverse opinion.
C) Unqualified/unmodified opinion.
D) Disclaimer of opinion.

Accepted Answer

If the auditor believes that there is minimal likelihood that resolution of an uncertainty will have a material effect on the financial statements, the auditor would issue an unqualified/unmodified opinion. This means that the auditor is satisfied with the financial statements and has no reservations about their fairness or compliance with accounting standards.

Question 9

Which of the following situations will not result in modification of the auditor's report because of a scope limitation?
A) Restriction imposed by the client.
B) Reliance placed on the report of another auditor.
C) Inability to obtain sufficient appropriate evidential matter.
D) Inadequacy in the accounting records.

Accepted Answer

When an auditor relies on the report of another auditor, it is not considered a scope limitation because the auditor has obtained sufficient appropriate audit evidence through the work of the other auditor. The other options (A, C, and D) would result in a scope limitation and potentially require modification of the auditor's report.

Question 10

When the audited financial statements of the prior year are presented together with those of the current year, the continuing auditor's report should cover
A) Both years.
B) Only the current year.
C) Only the current year, but the prior year's report should be presented.
D) Only the current year, but the prior year's report should be referred to.

Accepted Answer

The continuing auditor's report should cover both years when the audited financial statements of the prior year are presented with those of the current year to provide a complete and consistent audit opinion.

Question 11

When comparative financial statements are presented, the fourth standard of reporting, which refers to financial statements "taken as a whole," should be considered to apply to the financial statements of the
A) Periods presented plus the one preceding period.
B) Current period only.
C) Current period and those of the other periods presented.
D) Current and immediately preceding period only.

Accepted Answer

The fourth standard of reporting, which refers to financial statements "taken as a whole," should be considered to apply to the financial statements of the current period and those of the other periods presented in comparative financial statements. This means that the financial statements should be read and analyzed together to fully understand the company's financial performance and position over time. The immediately preceding period is included in this analysis, but so are any other prior periods presented for comparison.

Question 12

Which of the following parties is responsible for the fairness of the representations made in financial statements?
A) Entity's management.
B) Independent auditor.
C) Audit committee.
D) AICPA.

Accepted Answer

The entity's management is responsible for the fairness and accuracy of the financial statements. The management is responsible for making sure that the financial statements are in accordance with the accounting standards and that all the relevant information is disclosed. The independent auditor's role is to express an opinion on the financial statements but not responsible for their fairness. The audit committee is responsible for overseeing the audit process and ensuring the independence of the auditor. The AICPA is a professional organization that sets accounting standards and provides guidance to auditors but not responsible for the fairness of financial statements.

Question 13

Changes that do not affect consistency are normally disclosed in the footnotes but do not require an explanatory/emphasis-of-matter paragraph in the audit report.

Accepted Answer

This statement is correct. Changes that do not affect consistency are disclosed in the footnotes but do not require an explanatory/emphasis-of-matter paragraph in the audit report.

Question 14

An opinion based in part on the report of another auditor requires an explanatory/emphasis-of-matter paragraph be added to the standard unqualified/unmodified audit report.

Accepted Answer

An opinion based on the report of another auditor typically requires a reference to the other auditor in the auditor's responsibility section, not an explanatory/emphasis-of-matter paragraph.

Question 15

An auditor may be unable to express an unqualified opinion if an immaterial departure from GAAP is present in the financial statements.

Accepted Answer

An auditor may only issue an unqualified opinion if the financial statements present the company's financial position, results of operations, and cash flows in accordance with Generally Accepted Accounting Principles (GAAP). Even an immaterial departure from GAAP can result in an auditor being unable to express an unqualified opinion and requiring them to issue either a qualified opinion, adverse opinion, or disclaimer of opinion.

Question 16

The choice of which audit report to issue depends on the condition and the materiality of any departure.

Accepted Answer

The type of audit report issued depends on the condition and the materiality of any departure or deviation from generally accepted accounting principles. In other words, if there are significant issues that affect the financial statements, the auditor may issue a qualified or adverse opinion, whereas if the issues are minor or not pervasive, an unmodified or clean opinion may be issued.

Question 17

A predecessor auditor should complete the following before reissuing a report on statements presented on a comparative basis:
A) Read the financial statements of the current period.
B) Read the financial statements of the past five years.
C) Obtain a letter of representations from the current-year, successor auditor.
D) Read the financial statements of the current period and obtain a letter of representation from the current-year, successor auditor.

Accepted Answer

Before reissuing a report on statements presented on a comparative basis, the predecessor auditor should read the financial statements of the current period and obtain a letter of representation from the current-year, successor auditor. This will help the predecessor auditor to update their knowledge about the entity's financial statements and ensure that there are no material misstatements or misrepresentations. Reading the financial statements of the past five years or obtaining a letter of representations from the current-year, successor auditor will not be sufficient in ensuring the accuracy and completeness of the comparative financial statements.

Question 18

A scope limitation results from an inability to obtain sufficient appropriate evidence about some component of the financial statements.

Accepted Answer

A scope limitation occurs when an auditor is unable to obtain sufficient appropriate evidence about some component of the financial statements, resulting in a limitation in the scope of the audit. This can be caused by a variety of factors such as restricted access to records, incomplete documentation, or management refusal to provide information.

Question 19

For which of the following events would an auditor issue a report that does not include any reference to consistency?
A) A change in the method of accounting for inventories.
B) A change from an accounting principle that is not generally accepted to one that is generally accepted.
C) A change in the service life used to calculate depreciation expense.
D) A change in accounting principle without reasonable justification from management.

Accepted Answer

Consistency refers to the use of the same accounting methods and principles from one period to the next. A change in the service life used to calculate depreciation does not necessarily impact consistency and may not require disclosure in the auditor's report. Options A, B, and D all involve changes that are likely to impact consistency and require disclosure in the auditor's report.

Question 20

In connection with the examination of the consolidated financial statements of Mott Industries, Frazier, CPA, plans to refer to another CPA's examination of the financial statements of a subsidiary company. Under these circumstances, Frazier's report must disclose
A) The name of the other CPA and the type of report issued by the other CPA.
B) The portion of the financial statements examined by the other CPA.
C) The nature of Frazier's review of the other CPA's work.
D) In a footnote the portions of the financial statements that were covered by the examinations of both auditors.

Accepted Answer

Frazier's report must disclose the portion of the financial statements examined by the other CPA to clarify the division of responsibility.

Quiz 18: Reports on Audited Financial Statements

A basic assumption that underlies financial reporting is that an entity will continue as a going concern.

An auditor must disclaim an opinion when the auditor lacks independence.

A change in reporting entity is an example of an accounting change that affects comparability and requires an explanatory/emphasis-of-matter paragraph in the audit report.

A going concern issue requires a modification of the three-paragraph standard unqualified audit report (public company).

If the principal auditor decides to make reference to the other auditor's examination, the introductory paragraph must specifically indicate the

A change in accounting estimate is an example of an accounting change that affects comparability and requires an explanatory/emphasis-of-matter paragraph in the audit report.

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

Which of the following situations will not result in modification of the auditor's report because of a scope limitation?

When the audited financial statements of the prior year are presented together with those of the current year, the continuing auditor's report should cover

When comparative financial statements are presented, the fourth standard of reporting, which refers to financial statements "taken as a whole," should be considered to apply to the financial statements of the

Which of the following parties is responsible for the fairness of the representations made in financial statements?

Changes that do not affect consistency are normally disclosed in the footnotes but do not require an explanatory/emphasis-of-matter paragraph in the audit report.

An opinion based in part on the report of another auditor requires an explanatory/emphasis-of-matter paragraph be added to the standard unqualified/unmodified audit report.

An auditor may be unable to express an unqualified opinion if an immaterial departure from GAAP is present in the financial statements.

The choice of which audit report to issue depends on the condition and the materiality of any departure.

A predecessor auditor should complete the following before reissuing a report on statements presented on a comparative basis:

A scope limitation results from an inability to obtain sufficient appropriate evidence about some component of the financial statements.

For which of the following events would an auditor issue a report that does not include any reference to consistency?

In connection with the examination of the consolidated financial statements of Mott Industries, Frazier, CPA, plans to refer to another CPA's examination of the financial statements of a subsidiary company. Under these circumstances, Frazier's report must disclose