Question 1

When evaluating the results of audit tests, materiality depends upon both the dollar amount and the nature of the item.

Accepted Answer

Materiality depends on both the dollar amount and the nature of the item.

Question 2

When an auditor of financial statements has substantial doubt about an entity's ability to continue as a going concern, the auditor most likely would express a qualified opinion if:
A) The effects of the adverse financial conditions are likely to be negative.
B) Information about the entity's ability to continue as a going concern is not disclosed in the financial statements.
C) Management has no plans to reduce or delay future expenditures.
D) Negative trends and recurring operating losses appear to be irreversible.

Accepted Answer

If the financial statements do not disclose the substantial doubt about the entity's ability to continue as a going concern, the auditor would likely express a qualified opinion due to the lack of adequate disclosure.

Question 3

Which of the following is not explicitly included in an audit report for a nonpublic company?
A) A statement that the auditor believes that the audit provides a reasonable basis for expressing negative assurance.
B) A statement that the auditor's responsibility is to express an opinion on the financial statements.
C) A statement that the financial statements are the responsibility of management.
D) A title with the word "independent."

Accepted Answer

An audit report typically does not include a statement expressing negative assurance. Instead, it provides positive assurance that the financial statements are presented fairly in all material respects. Negative assurance is more commonly associated with review reports, not audits.

Question 4

When the auditors are unable to comply with generally accepted auditing standards, they should issue an opinion that is unmodified, but include an additional emphasis-of-matter paragraph in the report.

Accepted Answer

When auditors are unable to comply with generally accepted auditing standards, they cannot issue an unmodified opinion. Instead, they must either issue a qualified opinion, an adverse opinion, or a disclaimer of opinion. An emphasis-of-matter paragraph may be added to any of these types of opinions to draw attention to specific matters disclosed in the financial statements.

Question 5

When financial statements are affected by a material departure from generally accepted accounting principles, the auditors should:
A) Issue an unmodified opinion with a basis for modification paragraph.
B) Withdraw from the engagement.
C) Issue an "except for" qualification or an adverse opinion.
D) Issue an "except for" qualification or a disclaimer of opinion.

Accepted Answer

When financial statements are affected by a material departure from generally accepted accounting principles, the auditors should issue an "except for" qualification or an adverse opinion. This informs users that the financial statements are materially misstated and do not follow generally accepted accounting principles. Withdrawal from the engagement or issuing an unmodified opinion with a basis for modification paragraph would not be appropriate in this situation. A disclaimer of opinion would also not be appropriate because the financial statements could still be relied upon except for the material departure from GAAP.

Question 6

Audit reports should be dated as the date on which sufficient appropriate audit evidence has been collected.

Accepted Answer

Audit reports should be dated as the date on which sufficient appropriate audit evidence has been collected in order to ensure the accuracy and relevance of the report at the time of its issuance.

Question 7

A basis for a modification paragraph in the audit of the financial statements of a nonpublic company:
A) Is only included with qualified, adverse, or disclaimers of opinion.
B) Is presented after the opinion paragraph.
C) Has a section title: Emphasis-of-Matter.
D) Must be included in all nonpublic company audit reports.

Accepted Answer

A basis for a modification paragraph is included only when the auditor expresses a qualified opinion, an adverse opinion, or a disclaimer of opinion.

Question 8

After considering an entity's negative trends and financial difficulties, an auditor has substantial doubt about the entity's ability to continue as a going concern. The auditor's considerations relating to management's plans for dealing with the adverse effects of these conditions most likely would include management's plans to:
A) Increase current dividend distributions.
B) Reduce existing lines of credit.
C) Increase ownership equity.
D) Purchase assets formerly leased.

Accepted Answer

Increasing ownership equity would provide additional funds to the entity, helping them to overcome financial difficulties and sustain operations. A) increasing current dividend distributions would deplete available funds and negatively impact the company's ability to continue operations. B) Reducing existing lines of credit would limit the entity's ability to borrow and access funds, which could further exacerbate financial difficulties. D) Purchasing assets formerly leased may not be feasible or practical in light of the entity's financial difficulties.

Question 9

Regulation S-X governs the form and content of financial statements filed with the SEC.

Accepted Answer

Regulation S-X is a set of SEC regulations that governs the form and content of financial statements filed with the SEC.

Question 10

A public company's financial statements should be prepared following standards of the Public Company Accounting Oversight Board.

Accepted Answer

A public company's financial statements should be prepared following the standards set by the Financial Accounting Standards Board (FASB), which establishes Generally Accepted Accounting Principles (GAAP) in the United States. The Public Company Accounting Oversight Board (PCAOB) oversees the audits of public companies to ensure they are conducted in accordance with the appropriate standards.

Question 11

A client imposed scope limitation will generally result in a disclaimer of opinion, regardless of whether sufficient appropriate audit evidence is gathered using alternative procedures.

Accepted Answer

A client-imposed scope limitation may lead to a disclaimer of opinion if the auditor cannot obtain sufficient appropriate audit evidence. However, if alternative procedures provide enough evidence, the auditor may issue a qualified opinion instead.

Question 12

Which of the following procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern?
A) Performing cutoff tests of sales transactions with customers with long-standing receivable balances.
B) Evaluating the entity's procedures for identifying and recording related party transactions.
C) Inspecting title documents to verify whether any real property is pledged as collateral.
D) Inquiring of the entity's legal counsel about litigation, claims, and assessments.

Accepted Answer

Inquiring of the entity's legal counsel about litigation, claims, and assessments is the most relevant procedure for the auditor to identify conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern. Legal counsel often has knowledge of potential claims or lawsuits that could impact the entity's financial stability. Choice A is not relevant to going concern considerations. Choice B pertains to related party transactions, which may be a risk factor, but not necessarily an indicator of going concern issues. Choice C pertains to collateral and is not directly related to going concern issues.

Question 13

A change that the auditor agrees with from one generally accepted accounting principle to another generally accepted accounting principle that has a pervasive effect on net income usually results in an adverse opinion by the auditors.

Accepted Answer

A change from one GAAP to another GAAP that has a pervasive effect on net income and is properly disclosed does not necessarily result in an adverse opinion. The auditor may issue a qualified or an unqualified opinion with an emphasis of matter paragraph explaining the change.

Question 14

A scope restriction is least likely to result in a(an):
A) Qualified opinion.
B) Disclaimer of opinion.
C) Adverse opinion.
D) Standard unmodified opinion.

Accepted Answer

The answer of A scope restriction is least likely to...

Question 15

If financial statements contain a material departure from generally accepted accounting principles, the auditors usually should issue a disclaimer of opinion.

Accepted Answer

A disclaimer of opinion is issued when auditors cannot obtain sufficient appropriate evidence to form an opinion. For a material departure from GAAP, auditors typically issue a qualified or adverse opinion, depending on the severity.

Question 16

An auditor of financial statements believes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. In evaluating the entity's plans for dealing with the adverse effects of future conditions and events, the auditor most likely would consider, as a mitigating factor, the entity's plans to:
A) Repurchase the entity's stock at a price below its book value.
B) Issue stock options to key executives.
C) Lease rather than purchase operating facilities.
D) Accelerate the due date of an existing mortgage.

Accepted Answer

Leasing operating facilities instead of purchasing can reduce the entity's fixed costs and provide flexibility to adjust to changing economic conditions, which may help mitigate the adverse effects of future conditions and events. Repurchasing the entity's stock at a price below its book value, issuing stock options to key executives, and accelerating the due date of an existing mortgage would not directly address the entity's ability to continue as a going concern.

Question 17

When an auditor has concluded there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time beyond the current financial statement date (9/30/X1), the auditor's responsibility includes:
A) Preparing prospective financial information to verify whether management's plans can be effectively implemented.
B) Projecting conditions and events from one year prior to this year's date (9/30/X0) to 9/30/X1.
C) Issuing an adverse or negative assurance opinion, depending upon materiality, due to the possible effects on the financial statements.
D) Considering the adequacy of disclosure about the entity's possible inability to continue as a going concern.

Accepted Answer

When there is substantial doubt about the entity's ability to continue as a going concern, the auditor's responsibility includes considering the adequacy of disclosure about the entity's possible inability to continue as a going concern. The auditor will need to evaluate the adequacy of the disclosure in the financial statements and provide additional disclosures if necessary, but the auditor is not responsible for preparing prospective financial information or projecting conditions and events. Additionally, an adverse or negative assurance opinion may be issued, depending on materiality, due to the possible effects on the financial statements.

Question 18

If financial statements fail to disclose a material fact, the auditors may disclose the information in an emphasis-of-matter paragraph and, depending upon materiality, issue either a qualified opinion or adverse opinion on the statements.

Accepted Answer

If material facts are not disclosed in the financial statements, the auditors can issue an emphasis-of-matter paragraph to disclose the information. Depending on the materiality, the auditors may issue a qualified or adverse opinion on the financial statements.

Question 19

When there is a significant question about a company's ability to remain a going concern, the report issued is usually unmodified with an emphasis-of-matter paragraph.

Accepted Answer

An unmodified auditor's report is issued when the auditor determines that the financial statements are fairly presented in all material respects. However, if there is a significant doubt about the company's ability to continue as a going concern, the auditor adds an emphasis-of-matter paragraph to their report to draw attention to this issue. This paragraph does not modify the overall opinion, but it does provide additional information to the users of the financial statements.

Question 20

When an auditor does not confirm material accounts receivable, but is satisfied by the application of alternative auditing procedures, she normally should:
A) Issue an unmodified opinion, but disclose elsewhere in the report this departure from a customary procedure.
B) Issue an unmodified opinion with no reference to this omission.
C) Issue a qualified opinion or a disclaimer, depending on the materiality of the receivables.
D) Issue an adverse opinion.

Accepted Answer

The auditor is not required to confirm all material accounts receivable. If the auditor is satisfied with the application of alternative auditing procedures, an unmodified opinion can be issued without any reference to this omission, as long as the auditor has obtained sufficient appropriate audit evidence to support the financial statements. Therefore, Choice B is the best option.

Quiz 17: Auditors Report

When evaluating the results of audit tests, materiality depends upon both the dollar amount and the nature of the item.

When an auditor of financial statements has substantial doubt about an entity's ability to continue as a going concern, the auditor most likely would express a qualified opinion if:

Which of the following is not explicitly included in an audit report for a nonpublic company?

When the auditors are unable to comply with generally accepted auditing standards, they should issue an opinion that is unmodified, but include an additional emphasis-of-matter paragraph in the report.

When financial statements are affected by a material departure from generally accepted accounting principles, the auditors should:

Audit reports should be dated as the date on which sufficient appropriate audit evidence has been collected.

A basis for a modification paragraph in the audit of the financial statements of a nonpublic company:

Regulation S-X governs the form and content of financial statements filed with the SEC.

A public company's financial statements should be prepared following standards of the Public Company Accounting Oversight Board.

A client imposed scope limitation will generally result in a disclaimer of opinion, regardless of whether sufficient appropriate audit evidence is gathered using alternative procedures.

Which of the following procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern?

A change that the auditor agrees with from one generally accepted accounting principle to another generally accepted accounting principle that has a pervasive effect on net income usually results in an adverse opinion by the auditors.

A scope restriction is least likely to result in a(an) :

If financial statements contain a material departure from generally accepted accounting principles, the auditors usually should issue a disclaimer of opinion.

When an auditor has concluded there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time beyond the current financial statement date (9/30/X1) , the auditor's responsibility includes:

If financial statements fail to disclose a material fact, the auditors may disclose the information in an emphasis-of-matter paragraph and, depending upon materiality, issue either a qualified opinion or adverse opinion on the statements.

When there is a significant question about a company's ability to remain a going concern, the report issued is usually unmodified with an emphasis-of-matter paragraph.

When an auditor does not confirm material accounts receivable, but is satisfied by the application of alternative auditing procedures, she normally should: