Question 1

Holmes,CPA,assisted Williams Corporation in preparing its financial statements and gave Williams permission to use Holmes's name in communications containing these financial statements.If Holmes did not audit the financial statements,what type of opinion should be expressed?

Accepted Answer

Holmes should issue a disclaimer of opinion because he did not audit the financial statements and therefore cannot provide any level of assurance on them.

Question 2

Harris & Thompson were engaged to audit Smart Corp's comparative financial statements for the years ended December 31,Year 1 and Year 2.The Year 1 financial statements were presented in accordance with generally accepted accounting principles,but the Year 2 financial statements were determined to be materially misstated.As a result,Harris & Thompson should

Accepted Answer

Harris & Thompson should issue an unmodified opinion on the Year 1 financial statements, as they were presented in accordance with generally accepted accounting principles. However, due to material misstatements in the Year 2 financial statements, they should issue a qualified opinion on those statements. This will indicate to users of the financial statements that the Year 2 financial statements are not fairly presented and require further explanation.

Question 3

When a circumstance-imposed scope limitation has a material but not pervasive effect on the sufficiency of the auditors' evidence,the auditors' report will

Accepted Answer

When a circumstance-imposed scope limitation has a material but not pervasive effect on the sufficiency of the auditors' evidence, the auditors' report will modify the opinion paragraph.

Question 4

Carson,LLP audited Best Corporation's financial statements for the year ended December 31,Year 1.On February 15,Year 3,Carson gave Best permission to reissue the report previously issued on and dated March 1,Year 2.When is the cutoff date for Carson's responsibility on the reissued report?

Accepted Answer

The cutoff date for Carson's responsibility on the reissued report is the original report date, March 1, Year 2. This is because the auditor's responsibility extends to the date of the original report, not the date of reissuance or any subsequent events.

Question 5

When updating the report on prior years' financial statements presented in comparative form,the auditors' responsibility for the prior years' financial statements is

Accepted Answer

The auditors' responsibility for prior years' financial statements is extended to the date of the updated audit report when they update their report on those statements. This means they must consider any new information that may affect their opinion on the prior years' financial statements up to the date of the updated report.

Question 6

When a previously expressed opinion is updated from qualified to unmodified,the auditors' report on comparative financial statements should

Accepted Answer

When the previously expressed opinion is updated from qualified to unmodified, the auditors' report on comparative financial statements should update the previously expressed opinion and explain the reasons for the change, including a reference to the footnote describing the change. This is because a qualified opinion indicates a possible material misstatement in the financial statements, while an unmodified opinion indicates that the financial statements are fairly presented in all material respects. Therefore, it is important to provide an explanation for the change in opinion to provide transparency to the users of the financial statements.

Question 7

How do auditors make the following representations when issuing the standard (unmodified)auditors' report? 
$$\begin{array} { c c c } 
& \text {  } & \text { Use of judgrnent ir  } \
&\text { Consistent application of} & \text {  selecting audit  } \
&\text {  accounting principles } & \text { procedures} \
\text { A } & \text { Irmplicitly } & \text { Explicitly } \
\text { B. } & \text { Explicitly } & \text { Irmplicitly } \
\text { C. } & \text { Implicitly } & \text { Explicitly } \
\text { D. } & \text { Explicitly } & \text { Explicitly }
\end{array}$$

Accepted Answer

The answer of How do auditors make the following representations...

Question 8

Which of the following guidelines should be followed when a disclaimer of opinion is issued?

Accepted Answer

When a disclaimer of opinion is issued, the report should identify the financial statements to which the disclaimer applies, ensuring clarity about which statements are not being opined on.

Question 9

An entity's comparative financial statements include the financial statements of the prior year that were audited by a predecessor auditor whose report is not presented.If the predecessor's report was qualified,the successor should

Accepted Answer

If the predecessor auditor's report is not presented and it contained a qualification, the successor auditor should indicate the substantive reasons for the qualification in the predecessor auditor's report in the current year's report. This is required by AU-C section 510, which states that "the successor auditor should make reference to the report of the predecessor auditor, and describe the nature of, and reasons for, the predecessor auditor's qualification..." This ensures that users of the financial statements are aware of the reasons for the qualification and can better understand the effects on the current year's financial statements. Therefore, option D is the best choice.

Question 10

SEC registrants' financial statements should be accompanied by all of the following reports except:

Accepted Answer

SEC registrants' financial statements should be accompanied by auditors' report on financial statements and related disclosures and management's report on internal control over financial reporting. However, management's report on financial statements and related disclosures is not required to be included with the financial statements.

Question 11

When qualifying an opinion because of an insufficiency of audit evidence,an auditor should refer to the situation in the $$\begin{array} { l c c } 
&\text { Auditor s Responsibility } & \text { Notes to the finaricial } \
&\text { section } & \text { statements } \
\text { A. } & \text { Yes } & \text { Yes } \
\text { B. } & \text { Yes } & \text { No } \
\text { C. } & \text { No } & \text { Yes } \
\text { D. } & \text { No } & \text { No }
\end{array}$$

Accepted Answer

The answer of When qualifying an opinion because of an...

Question 12

After considering management's plans,an auditor concludes that there is substantial doubt about a client's ability to continue as a going concern for a reasonable period of time.The auditor's responsibility includes

Accepted Answer

The auditor's responsibility in this situation includes considering the adequacy of disclosure about the client's possible inability to continue as a going concern. This means that the auditor should review the financial statements and related notes to ensure that they include appropriate disclosures about the risks and uncertainties related to the client's ability to continue as a going concern. This disclosure is important to ensure that users of the financial statements are aware of the potential risks involved in investing in the client's business.

Additionally, the auditor may need to communicate their findings to the client's audit committee or board of directors, but this is not explicitly stated as a responsibility in the question. The auditor would not typically issue a disclaimer, qualified or adverse opinion based solely on management's plans or the possibility of financial difficulties without first considering the adequacy of disclosure.

Question 13

Holmes & Smith LLP were engaged to audit the financial statements of Sodolak Reality for the year ended December 31.During the engagement,Sodolak filed a lawsuit against Holmes & Smith LLP.What effect,if any,will this lawsuit have on the auditors' report?

Accepted Answer

A lawsuit against the auditors by the client impairs the auditors' independence, necessitating a disclaimer of opinion in the auditors' report.

Question 14

When auditors conclude that a material and pervasive departure from GAAP exists in an entity's financial statements,which of the following phrases would most likely be included in their report?

Accepted Answer

The phrase "do not present fairly in all material respects" is typically included in the auditor's report when there is a material and pervasive departure from GAAP. This indicates that the financial statements are not reliable or accurate and may mislead users. Choices B, C, and D are standard phrases used in auditor's reports but do not specifically address material and pervasive departures from GAAP.

Question 15

During the year under audit,Forrest Corporation experienced significant losses due to a pervasive fraud scheme.Because of the lack of documentary evidence and inability to perform appropriate auditing procedures,the auditors were unable to determine the total amount of the loss.What type of report should the auditors issue?

Accepted Answer

In this scenario, the auditors were unable to determine the full extent of the losses due to a pervasive fraud scheme. As a result, it is likely that they will be unable to obtain sufficient evidence to support their audit opinion. In such cases, the auditors may issue a disclaimer of opinion or a qualified opinion. However, as the losses are significant, and the auditors were unable to perform appropriate auditing procedures, a disclaimer of opinion is more appropriate than a qualified opinion. Therefore, the best choice is C - Disclaimer or qualified opinion.

Question 16

An auditor may report on summary financial statements that are derived from a complete set of audited financial statements only if the auditor

Accepted Answer

According to the Statement on Standards for Attestation Engagements (SSAE) No. 10, an auditor may report on summary financial statements that are derived from a complete set of audited financial statements if the auditor indicates whether the information is fairly stated in all material respects in relation to the complete financial statements. The auditor must also include a reference to the audited financial statements from which the summary financial statements were derived, and the summary financial statements should include all the disclosures necessary for the complete set of financial statements. The option A is incorrect because expressing an unmodified opinion is not enough to report on summary statements. The option C is incorrect because including all the necessary disclosures is not enough without indicating that the information is fairly stated. The option D is incorrect because presenting the statements in comparative form is not a requirement for reporting on summary financial statements.

Question 17

An auditor concludes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time.The entity's financial statements adequately disclose its financial difficulties.Under these circumstances,the auditor's report is required to include an emphasis-of-matter paragraph that specifically uses the phrase(s) $$\begin{array} { l c c } 
&&\text { "Possible }\
&\text { "Except for the effects } & \text { discontiruarce of the } \
&\text { of such adjustrnerts" } & \text { ertity's operations" } \\
\text { A } & \text { Yes } & \text { Yes } \
\text { B. } & \text { Yes } & \text { No } \
\text { C. } & \text { No } & \text { Yes } \
\text { D. } & \text { No } & \text { No }
\end{array}$$

Accepted Answer

The answer of An auditor concludes that there is substantial...

Question 18

Management determined it was probable that a pending litigation claim would result in a material loss.The loss was disclosed in the footnotes to the financial statements but was not accrued in the income statement.If the auditors believe an accrual should be made,what type of report should be issued?

Accepted Answer

If the auditors believe an accrual should be made but management has not recognized it, there is a departure from GAAP. In this case, the auditors should issue a qualified or adverse opinion based on the degree of materiality of the departure.

Question 19

Which of the following would not be communicated to users in the auditors' report on an entity's financial statements and related disclosures?

Accepted Answer

Specific details about the audit examination, such as materiality thresholds, are generally not included in the auditors' report. The report provides an opinion on whether the financial statements are presented fairly in all material respects in accordance with the applicable financial reporting framework, and may include information about unusual aspects of the audit or other matters affecting the client, but not specific details about the audit examination itself.

Question 20

The auditors have determined that there is substantial doubt about an entity's ability to continue as a going concern.When considering the appropriateness of management's disclosures and severity of the uncertainty,all of the following reports could be issued,except

Accepted Answer

A qualified opinion is not appropriate for a material and pervasive uncertainty about going concern; instead, a disclaimer of opinion would be issued.

Quiz 12: Reports on Audited Financial Statements