CHAPTER 3

Note to Instructors: Unless otherwise indicated in the text of a question, please assume that a
question applies to audits of public and private companies. Questions that relate only to public-
company matters will be noted by the phrase !ublic" beside the question number.
#ultiple-$hoice Questions
%. &uditin' standards require that the audit report must be titled and that the title must:
easy a. include the word (independent.)
a b. indicate if the auditor is a $!&.
c. indicate if the auditor is a proprietorship, partnership, or incorporated.
d. not include any discriminatory lan'ua'e.
*.
easy
+o emphasi,e the fact that the auditor is independent, the addressee of the audit report is
usually not:
a a. the company-s mana'ement.
b. the stoc.holders of the client company.
c. the board of directors of the client company.
d. either b or c.
/. +he purpose of the introductory para'raph in the standard unqualified report is:
easy a. to identify the entity that was audited.
d b. to identify the financial statements that were audited and the dates and time periods
covered by the report.
c. to communicate the responsibilities of mana'ement in preparin' the financial statements
and to clarify the respective roles of mana'ement and the auditor.
d. all of the above.
0. +he scope para'raph of the standard unqualified audit report states that the audit is desi'ned
to:
easy a. discover all errors and1or irre'ularities.
d b. discover material errors and1or irre'ularities.
c. conform to 'enerally accepted accountin' principles.
d. obtain reasonable assurance whether the statements are free of material misstatement.
2.
easy
3hich of the followin' is not an essential condition for issuin' the standard unqualified audit
opinion4
c a. &ll statements are included in the financial statements.
b. +he 'eneral standards have been followed in all respects.
c. +he financial statements are prepared in accordance with re'ulatory principles.
d. 5ufficient appropriate audit evidence has been accumulated.
6. +he audit report date on a standard unqualified report indicates:
easy a. the last day of the fiscal period.
d b. the date on which the financial statements were filed with the 5ecurities and 7xchan'e
$ommission.
c. the last date on which users may institute a lawsuit a'ainst either client or auditor.
d. the last day of the auditor-s responsibility for the review of si'nificant events that
occurred subsequent to the date of the financial statements.
/-%
8.
easy
d
&s a result of mana'ement-s refusal to permit the auditor to physically examine inventory, the
auditor has not accumulated sufficient appropriate evidence to conclude whether financial
statements are stated in accordance with 9&&!. +he auditor must depart from the unqualified
audit report because:
a. the financial statements have not been prepared in accordance with 9&&!.
b. the scope of the audit has been restricted by circumstances beyond either the client-s or
auditor-s control.
c. the auditor has lost independence.
d. the scope of the audit has been restricted.
:. &n adverse opinion is issued when the auditor believes:
easy a. some parts of the financial statements are materially misstated or misleadin'.
d b. the financial statements would be found to be materially misstated if an investi'ation
were performed.
c. the auditor is not independent.
d. the overall financial statements are so materially misstated that they do not present fairly
the financial position or results of operations and cash flows in conformity with 9&&!.
;. & disclaimer of opinion may be issued in which of the followin' instances4
easy a. +he auditor has doubts related to an entity-s ability to continue as a 'oin' concern.
d b. +here are hi'hly material misstatements in the financial statements.
c. +he auditor-s scope has been restricted due to circumstances beyond the client-s control.
d. & disclaimer may be issued for circumstances discussed in a and c.
%<. 3henever an auditor issues a standard unqualified audit report, the implication is the auditor:
easy a. does not .now if the financial statements are presented fairly in accordance with 9&&!.
d b. does not believe the financial statements are presented fairly in accordance with 9&&!.
c. believes the financial statements to be presented fairly in accordance with 9&&! except
for a specific aspect of them.
d. believes the financial statements are presented fairly in accordance with 9&&!.
%%.
easy
If a misstatement is immaterial to the financial statements of the entity for the current period,
but is expected to have a material effect in future periods, it is appropriate to issue an":
c a. adverse opinion.
b. qualified opinion.
c. unqualified opinion.
d. disclaimer of opinion.
%*. !ublic"
easy
3henever an auditor issues an audit report for a public company, the auditor can choose to
issue a report in which of the followin' forms4
c a. & combined report on financial statements and internal control over financial reportin'.
b. 5eparate reports on financial statements and internal control over financial reportin'.
c. 7ither a or b.
d. Neither a nor b.
%/.
easy
3hen determinin' whether an exception is (hi'hly material,) the extent to which the
exception affects different elements of the financial statements must be considered. +his
concept is called:
b a. materiality.
b. pervasiveness.
c. financial analysis.
d. ratio analysis.
/-*
%0.
easy
3hen the auditor believes a company-s financial statements are misleadin' because they were
not prepared in conformity with 9&&!, the auditor must issue an":
d a. qualified opinion.
b. adverse opinion.
c. disclaimer of opinion.
d. qualified or an adverse opinion, dependin' on materiality.
%2. !ublic"
easy
If an auditor performs an audit of a public company, the scope para'raph should ma.e
reference to which standards4
c a. &ccountin' standards.
b. 9enerally accepted auditin' standards.
c. 5tandards issued by the !$&=> U.5.".
d. &ny of the above standards.
%6.
easy
If an auditor performs an audit of a private company, the scope para'raph should ma.e
reference to which standards4
b a. &ccountin' standards.
b. U.5. 'enerally accepted auditin' standards.
c. 5tandards issued by the !$&=> U.5.".
d. &ny of the above standards.
%8.
easy
+he only unqualified opinions which contain modified wordin' excludin' an explanatory
para'raph" relate to:
a a. the use of other auditors.
b. material uncertainties.
c. substantial doubt about continuin' as a 'oin' concern.
d. lac. of consistent application of 9&&!.
%:.
easy
c
+he second standard of reportin' requires the auditor to call attention to circumstances in
which accountin' principles have not been consistently observed in the current period relative
to the precedin' period. 9&&! requires that chan'es in accountin' principles be to an":
a. more conservative principle.
b. equal or better principle.
c. preferable principle.
d. principle allowed by the company-s auditin' firm.
%;.
easy
& $!& may wish to emphasi,e specific matters re'ardin' the financial statements even thou'h
she intends to express an unqualified opinion. Normally, such explanatory information is:
c a. included in the scope para'raph.
b. included in the opinion para'raph.
c. included in a separate para'raph in the report.
d. included in the introductory para'raph.
/-/
*<.
easy
d
&n auditor who issues a qualified opinion because she was unable to obtain sufficient
appropriate evidence should describe the limitations in an explanatory para'raph. +he auditor
should also refer to the limitation in the:
5cope =pinion Notes to the
para'raph para'raph financial statements
a. ?es No ?es
b. ?es ?es ?es
c. No ?es No
d. ?es ?es No
*%.
medium
3hen the auditor evaluates the effect of a chan'e in accountin' principle, the materiality of the
chan'e should be evaluated based on:
b a. the prior years presented.
b. the current year effect of the chan'e.
c. whatever basis the auditor considers appropriate.
d. the effect on total assets.
**.
medium
$onditions requirin' a departure from an unqualified audit report include all but which of the
followin'4
b a. #ana'ement refused to allow the auditor to confirm si'nificant accounts receivable for
which there were no alternative procedures performed.
b. #ana'ement decided not to allow the auditor to confirm si'nificant accounts receivable,
but the auditor obtained sufficient appropriate evidence by examinin' subsequent cash
receipts.
c. +he audit partner-s dependent child received a 'ift of %<< shares of a client-s stoc. for
her birthday from a 'randparent.
d. #ana'ement has determined that fixed assets should be reported in the balance sheet at
their replacement values rather than historical costs. +he auditors do not concur.
*/. +he introductory para'raph of the standard audit report states that the financial statements are:
medium a. the responsibility of the auditor.
b b. the responsibility of mana'ement.
c. the @oint responsibility of mana'ement and the auditor.
d. none of the above.
*0.
medium
+he introductory para'raph of the standard audit report states that the financial statements and
the opinion expressed about those statements are:
d a. the responsibility of the auditor.
b. the responsibility of mana'ement.
c. the @oint responsibility of mana'ement and the auditor.
d. none of the above.
*2. +he introductory para'raph of the standard audit report states that the auditor is:
medium a. responsible for the financial statements and the opinion on them.
c b. responsible for the financial statements.
c. responsible for the opinion on the financial statements.
d. @ointly responsible for the financial statements with mana'ement.
/-0
*6. !ublic"
medium
!$&=> &uditin' 5tandard No. * requires the audit of internal control over financial reportin'
to be inte'rated with:
a a. the audit of the financial statements.
b. the quarterly review of financial information.
c. the review of annual financial statements.
d. none of the above.
*8.
medium
d
+he audit report indicates that %" mana'ement is responsible for the content of the financial
statements and *" the auditor is responsible for evaluatin' the appropriateness of the
accountin' principles chosen by mana'ement. 3hich para'raph contains those statements4
a. >oth are in the introductory para'raph.
b. >oth are in the scope para'raph.
c. >oth are in the opinion para'raph.
d. None of the above are true.
*:. 3hich of the followin' is a false statement about the audit report4
medium a. +he opinion para'raph is related to the first and fourth reportin' standards.
c b. +he auditor is required to state a conclusion about whether the company followed
'enerally accepted accountin' principles.
c. +he opinion para'raph may follow any form deemed appropriate by the auditor.
d. +he auditor should express an opinion about the financial statements ta.en as a whole.
*;.
medium
b
If the balance sheet of a company is dated Aecember /%, *<<8, the audit report is dated
Bebruary :, *<<:, and both are released on Bebruary %2, *<<:, this indicates that the auditor
has searched for subsequent events that occurred up to:
a. Aecember /%, *<<8.
b. Bebruary :, *<<:.
c. Bebruary %2, *<<:.
d. none of these.
/<. >oth disclaimers and adverse opinions are used:
medium a. only when a condition is hi'hly material.
a b. whether the condition affectin' the financial statements is material or not.
c. re'ardless of the auditor-s independence.
d. re'ardless of client-s choice of a non-9&&! accountin' method.
/%. +he least severe type of audit report for disclosin' departures from 9&&! is the:
medium a. adverse opinion.
c b. disclaimer of opinion.
c. qualified opinion.
d. report on unaudited financial statements.
/*. !ublic"
medium
& combined report on financial statements and internal control over financial reportin'
includes all but which of the followin' types of para'raphs4
b a. Inherent limitations para'raph.
b. Aescription para'raph.
c. =pinion para'raph.
d. 7ach of the above para'raphs is included.
/-2
//. 3henever an auditor issues a qualified opinion, the implication is that the auditor:
medium a. does not .now if the financial statements are presented fairly.
d b. does not believe the financial statements are presented fairly.
c. believes the financial statements are presented fairly.
d. believes the financial statements are presented fairly (except for) a specific aspect of
them.
/0. +he necessity to issue a disclaimer of opinion may arise because of:
medium a. a severe limitation on the scope of the audit.
c b. a lac. of independence between the auditor and client.
c. either a or b.
d. neither a nor b.
/2. &udit report lan'ua'e may be modified for which of the followin' conditions4
medium a. Cac. of consistent application of 9&&!.
c b. 5ubstantial doubt about continuin' as a 'oin' concern.
c. Deports involvin' other auditors.
d. 7mphasis of a matter.
/6.
medium
3hen the auditor determines the financial statements are fairly stated and then determines that
he is not independent, the auditor should issue:
b a. an adverse opinion.
b. a disclaimer of opinion.
c. either a qualified opinion or an adverse opinion.
d. either a qualified opinion or an unqualified opinion with modified wordin'.
/8. If the auditor lac.s independence, a disclaimer of opinion must be issued:
medium a. if the client requests it.
d b. only if it is hi'hly material.
c. only if it is material but not hi'hly material.
d. in all cases.
/:.
medium
#isstatements must be compared with some measurement base before a decision can be made
about materiality. & commonly accepted measurement base includes:
d a. net income.
b. total assets.
c. wor.in' capital.
d. all of the above.
/;.
medium
3hen comparin' misstatements with a measurement base, the auditor must consider the
pervasiveness of the misstatement. &n example of a pervasive misstatement is an":
a a. understatement of inventory.
b. understatement of retained earnin's caused by a miscalculation of dividends payable.
c. misclassification of notes payable as a lon'-term liability when it should be current.
d. misclassification of salary expense as a sellin' expense when it should be allocated
equally to both sellin' and administrative expense.
/-6
0<.
medium
+he dollar amount of some misstatements cannot be accurately measured. Bor example, if the
client were unwillin' to disclose an existin' lawsuit, the auditor must estimate the li.ely effect
on:
b a. net income.
b. users of the financial statements.
c. the auditor-s exposure to lawsuits.
d. mana'ement-s future decisions.
0%.
medium
=f the two ma@or cate'ories of scope restrictions, those caused by a client and those caused by
conditions beyond the control of either a client or auditor, the effect on the auditor-s report is:
a a. the same for either.
b. more serious for client-imposed restrictions.
c. more serious for conditions beyond the control of a client or auditor.
d. ne'li'ible.
0*. 3henever there is a scope restriction, the appropriate response is to issue an":
medium a. disclaimer of opinion.
d b. adverse opinion.
c. qualified opinion.
d. unqualified report, a qualification of scope and opinion, or a disclaimer, dependin' on
materiality.
0/.
medium
3hich of the followin' is least li.ely to cause uncertainty about the ability of an entity to
continue as a 'oin' concern4
a a. & client-s lawsuit a'ainst another company which claims the other company has
infrin'ed on its patent.
b. Coss of ma@or customers.
c. 5i'nificant recurrin' operatin' losses.
d. 3or.in' capital deficiencies.
00.
medium
d
+he client has presented all required financial statements with the exception of the statement
of cash flows. +he auditor has completed the audit and is satisfied that all other statements are
presented fairly. +he auditor:
a. may issue either an unqualified or a qualified opinion.
b. must issue an adverse opinion with (except for) in the opinion para'raph.
c. may issue an unqualified opinion.
d. must issue a qualified opinion with (except for) in the opinion para'raph.
02. 3hen a disclaimer is issued because the auditor lac.s independence:
medium a. no report title is included on the report.
d b. a one-para'raph audit report is issued.
c. the only reason cited for issuin' the disclaimer is the lac. of independence.
d. all of the above are correct.
06. 3hen an auditor issues a qualified report, an adverse report, or a disclaimer, the auditor:
medium a. has not performed a satisfactory audit.
c b. is not satisfied that the financial statements are presented fairly.
c. either a or b.
d. none of these.
/-8
08.
medium
d
3hen a client has not applied 9&&! consistently from the prior year to the current year, the
auditor does not concur with the appropriateness of the chan'e, and the chan'e in 9&&! has a
material effect on the financial statements, the auditor should issue an":
a. disclaimer.
b. adverse opinion.
c. unqualified opinion.
d. qualified opinion.
0:.
medium
#atters for which an auditor may believe an explanatory para'raph should be added to the
audit report include all but which of the followin'4
b a. +he existence of si'nificant related party transactions.
b. #aterial uncertainties not disclosed in the footnotes.
c. Important events occurrin' subsequent to the balance sheet date.
d. 7ach of the above should result in an explanatory para'raph bein' added to emphasi,e
the matter.
0;.
medium
3hich of the followin' is not a chan'e that affects consistency and, therefore, does not require
an explanatory para'raph4
c a. $han'e in accountin' principle, such as a chan'e from CIB= to BIB=.
b. $han'e in reportin' entity, such as the inclusion of an additional company in combined
financial statements.
c. $han'e in an estimate, such as a decrease in the life of an asset for depreciation purposes.
d. $orrection of errors by chan'in' from non-9&&! to 9&&!.
2<.
medium
c
Items that materially affect the comparability of financial statements 'enerally require
disclosure in the footnotes. If the client refuses to properly disclose the item, the auditor may
be required to issue:
a. the disclaimer.
b. an unqualified opinion.
c. a qualified opinion.
d. an adverse opinion.
2%.
medium
&uditors sometimes encounter situations in which the outcome of a matter cannot be
reasonably estimated at the time the financial statements are issued. +hese matters are referred
to as:
c a. inestimable matters.
b. non sequiturs.
c. uncertainties.
d. in-suspense matters.
2*.
medium
b
3hen there is uncertainty about a company-s ability to continue as a 'oin' concern, the
auditor-s concern is the possibility that the client may not be able to continue its operations or
meet its obli'ations for a (reasonable period of time.) Bor this purpose, a reasonable period of
time is considered not to exceed:
a. six months from the date of the financial statements.
b. one year from the date of the financial statements.
c. six months from the date of the audit report.
d. one year from the date of the audit report.
/-:
2/.
medium
3hen the auditor concludes that there is substantial doubt about the entity-s ability to continue
as a 'oin' concern, the appropriate audit report would be:
d a. an unqualified opinion with an explanatory para'raph.
b. a disclaimer of opinion.
c. neither a nor b.
d. either a or b.
20. &n auditor may not issue a qualified opinion when:
medium a. a scope limitation prevents the auditor from completin' an important audit procedure.
c b. the auditor-s report refers to the wor. of a specialist.
c. the auditor lac.s independence with respect to the audited entity.
d. an accountin' principle at variance with 9&&! is used.
22.
medium
3hen a company-s financial statements contain a departure from 9&&! with which the
auditor concurs, the departure should be explained in:
b a. the scope para'raph.
b. an explanatory para'raph that appears before the opinion para'raph.
c. the opinion para'raph.
d. an explanatory para'raph after the opinion para'raph.
26.
medium
3hich of the followin' representations does an auditor ma.e explicitly and which implicitly
when issuin' an unqualified opinion4
b $onformity &dequacy of
with 9&&! disclosure
a. 7xplicitly 7xplicitly
b. 7xplicitly Implicitly
c. Implicitly 7xplicitly
d. Implicitly Implicitly
28.
medium
c
3illiam 9re'ory, $!&, is the principal auditor for a multi-national corporation. &nother $!&
has examined and reported on the financial statements of a si'nificant subsidiary of the
corporation. 9re'ory is satisfied with the independence and professional reputation of the
other auditor, as well as the quality of the other auditor-s examination. 3ith respect to his
report on the consolidated financial statements, ta.en as a whole, 9re'ory:
a. must not refer to the examination of the other auditor.
b. must refer to the examination of the other auditor.
c. may refer to the examination of the other auditor.
d. may refer to the examination of the other auditor, in which case 9re'ory must include in
the auditor-s report on the consolidated financial statements a qualified opinion with
respect to the examination of the other auditor.
2:.
medium
d
& company has chan'ed its method of inventory valuation from an unacceptable one to one in
conformity with 'enerally accepted accountin' principles. +he auditor-s report on the financial
statements of the year of the chan'e should include:
a. no reference to consistency.
b. a reference to a prior period ad@ustment in the opinion para'raph.
c. an explanatory para'raph that @ustifies the chan'e and explains the impact of the chan'e
on reported net income.
d. an explanatory para'raph explainin' the chan'e.
/-;
2;. !ublic"
medium
a
5arbanes-=xley requires auditors of a public company to audit a company-s financial
statements and attest to mana'ement-s report on the effectiveness of internal control over
financial reportin'. 3hat type of assurance does the auditor provide in this report4
a. !ositive assurance on the financial statements and on the effectiveness of internal control
over financial reportin'.
b. !ositive assurance on the financial statements and ne'ative assurance on the effectiveness
of internal control over financial reportin'.
c. Cimited assurance on the financial statements and on the effectiveness of internal control
over financial reportin'.
d. +here is no 'uidance on what level of assurance to provide.
6<.
medium
c
3henever the client imposes restrictions on the scope of the audit, the auditor should be
concerned that mana'ement may be tryin' to prevent discovery of misstatements. In such
cases, the auditor will li.ely issue a:
a. disclaimer of opinion in all cases.
b. qualification of both scope and opinion in all cases.
c. disclaimer of opinion whenever materiality is in question.
d. qualification of both scope and opinion whenever materiality is in question.
6%.
medium
$!&s issue several types of (special audit reports.) 3hich of the followin' circumstances
would not require the issuance of a special audit report4
b a. +he client-s financial statements are prepared usin' the cash basis.
b. +he client-s financial statements are prepared usin' the accrual basis.
c. +he $!& has been retained to audit only the current assets.
d. +he $!& has been retained to review the internal control system, not the financial
statements.
6*.
challen'in'
b
+hree of the para'raphs of the audit report modified for uncertainties are the same as the
standard unqualified report. +he explanatory para'raph that describes the uncertainty is added
as the:
a. first para'raph.
b. fourth and last para'raph.
c. third para'raph with the opinion para'raph last.
d. second para'raph with the opinion para'raph last.
6/. 3hen a qualified or adverse opinion is issued, the qualifyin' para'raph is inserted:
challen'in' a. between the introductory and scope para'raphs.
b b. between the scope and opinion para'raphs.
c. after the opinion para'raph, as a fourth para'raph.
d. immediately after the address, as the first para'raph.
60. Bor the report containin' a disclaimer for lac. of independence, the disclaimer is in the:
challen'in' a. third or opinion para'raph.
c b. second or scope para'raph.
c. first and only para'raph.
d. fourth or explanatory para'raph.
62. 3hich of the followin' is not a primary cate'ory of attestation report4
challen'in' a. $ompilation report.
a b. Deview report.
c. &udit report.
d. 5pecial audit report based on a basis of accountin' other than 9&&!.
66.
challen'in'
#ost auditors believe that financial statements are (presented fairly) when the statements are
in accordance with 9&&!, and that it is also necessary to:
b a. determine that they are not in violation of B&5> statements.
b. examine the substance of transactions and balances for possible misinformation.
/-%<
c. review the statements usin' the accountin' principles promul'ated by the 57$.
d. assure investors that net income reported this year will be exceeded in the future.
68. In which of the followin' situations would the auditor most li.ely issue an unqualified report4
challen'in' a. +he client valued endin' inventory by usin' the replacement cost method.
d b. +he client valued endin' inventory by usin' the Next-In-Birst-=ut NIB=" method.
c. +he client valued endin' inventory at sellin' price rather than historical cost.
d. +he client valued endin' inventory by usin' the Birst-In-Birst-=ut BIB=" method, but
showed the replacement cost of inventory in the Notes to the Binancial 5tatements.
6:. 3hich of the followin' statements is true4
challen'in'
d
a. +he auditor is required to issue a disclaimer of opinion in the event of a material
uncertainty.
b. +he auditor is required to issue a disclaimer of opinion in the event of a 'oin' concern
problem.
c. +he auditor is required to issue a disclaimer of opinion for a material uncertainty and for
a 'oin' concern problem.
d. +he auditor has the option, but is not required, to issue a disclaimer of opinion for a
material uncertainty or for a 'oin' concern problem.
6;. & qualified report can ta.e the form of:
challen'in' a. a qualification of both the scope and the opinion.
c b. a qualification of the opinion alone.
c. either a or b.
d. neither a nor b.
8<. +he use of a qualification of the opinion alone is restricted to those situations in which the:
challen'in' a. scope of the auditor-s examination has been restricted.
b b. financial statements have not been prepared in accordance with 9&&!.
c. auditor is not independent.
d. auditor was hired to do a (review) or (compilation.)
8%.
challen'in'
+he primary concerns" in assessin' materiality when a client has failed to follow 9&&!
includes":
d a. the total dollar error in the accounts involved compared with some base.
b. the nature of the item.
c. the qualitative nature of the item.
d. all of the above.
8*.
challen'in'
+he most common case in which conditions beyond the client-s and auditor-s control cause a
scope restriction is an en'a'ement:
a a. a'reed upon after the client-s balance sheet date.
b. where the client won-t allow the auditor to confirm receivables for fear of offendin' its
customers.
c. where the auditor doesn-t have enou'h staff to satisfactorily audit all of the client-s
forei'n subsidiaries.
d. where the client is 'oin' throu'h $hapter %% ban.ruptcy.
/-%%
8/.
challen'in'
3hen the auditor cannot perform procedures and the amounts are so material that a disclaimer
of opinion rather than a qualified opinion is required, the:
d a. opinion para'raph will state (does not present fairly.)
b. opinion para'raph will state (presents fairly.)
c. scope para'raph will be unchan'ed from the standard unqualified opinion.
d. scope para'raph will be deleted.
80.
challen'in'
3hen misstatements are so material that an adverse opinion is issued, a scope para'raph
would be:
b a. qualified.
b. unchan'ed.
c. deleted.
d. expanded to identify the additional procedures which the auditor performed.
82.
challen'in'
3hen the client fails to ma.e adequate disclosure in the body of the statements or in the
related footnotes, it is the responsibility of the auditor to:
d a. inform the reader that disclosure is not adequate, and to issue an adverse opinion.
b. inform the reader that disclosure is not adequate, and to issue a qualified opinion.
c. present the information in the audit report and issue an unqualified or qualified opinion.
d. present the information in the audit report and to issue a qualified or an adverse opinion.
86.
challen'in'
+he (unqualified report with explanatory para'raph) and the (unqualified report with
modified wordin'):
c a. arise as a result of an incomplete audit.
b. arise when the financial statements are not (presented fairly.)
c. meet the criteria of a complete audit with satisfactory results.
d. meet the criteria of a complete audit but with unsatisfactory results.
88.
challen'in'
3hich of the followin' is not a cause of an explanatory para'raph or modified wordin' to be
added to the standard unqualified report4
c a. 7mphasis of a matter.
b. Deports involvin' other auditors.
c. &uditor disa'rees with client-s departure from 9&&!.
d. Cac. of consistent application of 9&&!.
8:.
challen'in'
3hich of the followin' is not one of the principal $!& firm-s alternatives when issuin' a
report if a different $!& firm performed part of the audit4
a a. Issue a @oint report si'ned by both $!& firms.
b. #a.e no reference to the other $!& firm in the audit report, and issue the standard
unqualified opinion.
c. #a.e reference to the other auditor in the report by usin' modified wordin' a shared
opinion or report"
d. & qualified opinion or disclaimer, dependin' on materiality, is required if the principal
auditor is not willin' to assume any responsibility for the wor. of the other auditor.
8;. 3hich of the followin' statements is not true4
challen'in' a. & one-para'raph report is 'enerally used when the auditor is not independent.
c b. & three-para'raph report ordinarily indicates there are no exceptions in the audit.
c. #ore than three para'raphs in the report indicates there must be some type of
qualification in the audit.
d. &n unqualified opinion with an explanation or modified wordin' would require more
than three para'raphs.
:<.
challen'in'
>rown $o.-s financial statements adequately disclose uncertainties that concern future events,
the outcome of which are not reasonably estimable. +he auditor-s report should include an":
a a. unqualified opinion.
/-%*
b. (sub@ect to) qualified opinion.
c. (except for) qualified opinion.
d. adverse opinion.
:%. 3hich of the followin' requires reco'nition in the auditor-s opinion as to consistency4
challen'in'
c
a. +he correction of an error in the prior year-s financial statements resultin' from a
mathematical mista.e in capitali,in' interest.
b. & chan'e in the estimate of provisions for warranty costs.
c. +he chan'e from the cost method to the equity method of accountin' for investments in
common stoc..
d. & chan'e in depreciation method which has no effect on current year-s financial
statements but is certain to affect future years.
:*.
challen'in'
a
3hen an auditor encounters a situation involvin' more than one of the conditions requirin' a
departure from a standard unqualified report, the auditor should modify his or her opinion for
each condition unless one has the effect of neutrali,in' the others. In which of the followin'
situations would the auditor not include more than one modification in the report4
a. +here is a material scope limitation, and the auditor is not independent.
b. +here is a material 9&&! violation, and the auditor is not independent.
c. +here is a material scope limitation, and there is substantial doubt about the company-s
ability to continue as a 'oin' concern.
d. +here is a substantial doubt about the company-s ability to continue as a 'oin' concern,
and information about the causes of the uncertainties is not adequately disclosed in a
footnote.
7ssay Questions
:/.
easy
Aiscuss how materiality affects audit reportin' decisions.
&nswer:
3hen determinin' the appropriate audit report to issue, the auditor considers three levels
of materiality for a 'iven condition. +hese three levels are %" immaterial, *" material
without overshadowin' the financial statements as a whole, and /" hi'hly material. Bor
conditions involvin' a 9&&! violation, the materiality level of the violation influences
whether an unqualified, qualified, or adverse opinion is issued. Bor conditions involvin'
a scope restriction, the materiality of the restriction influences whether an unqualified
report, a qualified scope and opinion report, or a disclaimer of opinion is issued.
/-%/
:0.
medium
+here are five conditions that must be met before an auditor can issue a standard unqualified
report for the audit of a private company. !lease discuss each of these five conditions.
&nswer:
+he five conditions that @ustify issuin' a standard unqualified report are:
&ll statementsEbalance sheet, income statement, statement of retained earnin's,
and statement of cash flowsEare included in the financial statements.
+he three 'eneral standards of 9&&5 have been followed in all respects on the
en'a'ement.
5ufficient appropriate audit evidence has been accumulated and the auditor can
conclude that the three fieldwor. standards have been followed.
+he financial statements are presented in accordance with 9&&!.
+here are no circumstances requirin' the addition of an explanatory para'raph or
modification of the wordin' of the report.
:2.
medium
+here are three conditions requirin' a departure from an unqualified audit report. Aiscuss each
of these three conditions and state the appropriate audit report for each condition.
&nswer:
+he three conditions requirin' a departure from an unqualified report are:
a scope restriction imposed by the client or by circumstances beyond the auditor-s or
client-s control which prevents the auditor from accumulatin' sufficient evidence to
reach a conclusion re'ardin' whether financial statements are stated in accordance
with 9&&!. In this condition, the auditor would issue either a qualified scope and
opinion report, or a disclaimer of opinion.
the financial statements were not prepared in accordance with 9&&!. In this
condition, the auditor would issue a qualified opinion if the 9&&! violation were
moderately material, or an adverse opinion if the 9&&! violation were hi'hly
material.
the auditor is not independent. In this condition, the auditor must issue a disclaimer
of opinion.
/-%0
:6.
medium
In certain circumstances, an auditor will issue an unqualified report, but the wordin' will differ
from that of a standard unqualified report. Aiscuss each of the five circumstances when an
auditor would issue an unqualified report with an explanatory para'raph or modified wordin'.
&nswer:
&n unqualified report with an explanatory para'raph or modified wordin' is appropriate
in the followin' circumstances:
Lack of consistent application of GAAP. 3hen the client has not followed 'enerally
accepted accountin' principles consistently in the current period in relation to the
precedin' period, an unqualified opinion with an explanatory para'raph followin'
the opinion para'raph is appropriate.
Substantial doubt about continuing as a going concern. 3hen an auditor concludes
there is substantial doubt about the client-s ability to continue as a 'oin' concern, an
unqualified opinion with an explanatory para'raph followin' the opinion para'raph
is appropriate. +he auditor also has the option of issuin' a disclaimer of opinion.
A departure from GAAP with which the auditor concurs. If adherence to 9&&!
would result in misleadin' financial statements, an unqualified opinion with an
explanatory para'raph is appropriate.
Emphasis of a matter. If the auditor wants to emphasi,e specific matters in the audit
report, an explanatory para'raph discussin' those matters may be added to an
unqualified report.
Reports involving other auditors. 3hen an auditor relies upon a different $!& firm
to perform part of the audit, the auditor can indicate that responsibility for the audit
is shared with another $!& firm by modifyin' the wordin' of an unqualified report.
:8.
medium
&n audit report prepared by 9arrett and >rown, $!&s, is provided below. +he audit for the
year ended Aecember /%, *<<8 was completed on #arch %, *<<:, and the report was issued to
Favlin $orporation, a private company, on #arch %/, *<<:. Cist any deficiencies in this report.
Ao not rewrite the report.
3e have examined the accompanyin' financial statements of Aalton $orporation as of
Aecember /%, *<<8. +hese financial statements are the responsibility of the company-s
mana'ement. =ur responsibility is to express an opinion on these statements based on our
audit.
3e conducted our audit in accordance with 'enerally accepted accountin' principles.
+hose principles require that we plan and perform the audit to provide reasonable assurance
about whether the financial statements are free of misstatement. &n audit includes examinin',
on a test basis, evidence supportin' the amounts and disclosures in the financial statements.
3e believe that our audit provides a reasonable basis for our opinion.
In our opinion, except for the effects of not capitali,in' certain lease obli'ations that
should be capitali,ed in order to conform with 'enerally accepted accountin' principles, the
financial statements referred to above present accurately the financial position of Facob
$orporation as of Aecember /%, *<<8, in conformity with accountin' principles 'enerally
accepted in the United 5tates of &merica.
9arrett and >rown, $!&s
#arch, *<<:
&nswer:
/-%2
+he audit report contains the followin' deficiencies:
+he report title is missin'.
+he report is not addressed to anyone and should be addressed to shareholders or the
board of directors.
+he introductory para'raph should refer to an (audit,) not an (examination.)
+he introductory para'raph should list the financial statements that were audited.
+he introductory para'raph refers to the wron' company.
+he scope para'raph should state the audit was conducted in accordance with
auditin' standards 'enerally accepted in the United 5tates of &merica, not 'enerally
accepted accountin' principles.
(+hose principles G) should read (+hose standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatements.)
+he scope para'raph should contain the followin' phrase: (&n audit also includes
assessin' the accountin' principles used and si'nificant estimates made by
mana'ement, as well as evaluatin' the overall financial statement presentation.)
Bollowin' the scope para'raph, there should be an explanatory para'raph that
discusses the 9&&! violation related to the failure to capitali,e certain lease
obli'ations.
In the opinion para'raph, the auditor should state that the financial statements
present fairlyG, not present accuratelyG
In the opinion para'raph, the phrase (Gin all material respectsG) should be
included.
In the opinion para'raph, the phrase (Gand the results of its operations and its cash
flows for the year then endedG) should be included.
+he audit report should be dated #arch %/, *<<:.
::.
medium
Aiscuss the differences re'ardin' how matters affectin' consistency and matters affectin'
comparability are referred to in the audit report. !rovide two examples of each type of chan'e.
&nswer:
+he auditor should disclose a material lac. of consistent application of 9&&! by addin'
an explanatory para'raph after the unqualified opinion para'raph. +he explanatory
para'raph should discuss the nature of the chan'e and should refer to the footnote in the
financial statements that discusses the chan'e. $han'es that affect comparability, but not
consistency, require no such explanatory para'raph in the audit report, assumin' the
chan'e is disclosed in the footnotes.
7xamples of chan'es affectin' consistency include chan'es in accountin' principles,
chan'es in reportin' entities, and correction of errors involvin' accountin' principles.
7xamples of chan'es affectin' comparability include chan'es in an estimate, error
corrections not involvin' accountin' principles, variations in the format and presentation
of financial information, and chan'es because of substantially different transactions or
events.
/-%6
:;. !ublic"
medium
+he followin' is a portion of an adverse audit report issued for a public company. Note: &
separate report was issued on the effectiveness of internal control over financial reportin'."
Independent Auditors Report
+o the shareholders of 3allace $orporation
3e have audited the accompanyin' balance sheet of 3allace $orporation as of Aecember
/%, *<<8, and the related statements of income, retained earnin's, and cash flows for the year
then ended. +hese financial statements are the responsibility of the company-s mana'ement.
=ur responsibility is to express an opinion on these financial statements based on our audit.
3e conducted our audit in accordance with the standards of the !ublic $ompany
&ccountin' =versi'ht >oard United 5tates". +hose standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. &n audit includes examinin', on a test basis, evidence
supportin' the amounts and disclosures in the financial statements. &n audit also includes
assessin' the accountin' principles used and si'nificant estimates made by mana'ement, as
well as evaluatin' the overall financial statement presentation. 3e believe that our audit
provides a reasonable basis for our opinion.
+he company has excluded from property and debt in the accompanyin' balance sheet
certain lease obli'ations that, in our opinion, should be capitali,ed in order to conform with
'enerally accepted accountin' principles. If these lease obli'ations were capitali,ed, property
would be increased by H%0,2<<,<<<, lon'-term debt by H%/,*<<,<<<, and retained earnin's by
H%,/<<,<<< as of Aecember /%, *<<8, and net income and earnin's per share would be
increased by H%,/<<,<<< and H*.*2, respectively, for the year then ended.
Required
$omplete the above adverse audit report by preparin' the opinion para'raph. Ao not date or
si'n the report.
&nswer:
In our opinion, because of the effects of the matters discussed in the precedin' para'raph,
the financial statements referred to above do not present fairly, in conformity with
'enerally accepted accountin' principles, the financial position of 3allace $orporation as
of Aecember /%, *<<8, or the results of its operations and its cash flows for the year then
ended.
/-%8
;<.
medium
+he followin' is a portion of a qualified audit report issued for a private company:
Independent Auditors Report
+o the shareholders of +amara. $orporation
3e have audited the accompanyin' balance sheet of +amara. $orporation as of =ctober
/%, *<<8, and the related statements of income, retained earnin's, and cash flows for the year
then ended. +hese financial statements are the responsibility of the company-s mana'ement.
=ur responsibility is to express an opinion on these financial statements based on our audit.
3e conducted our audit in accordance with auditin' standards 'enerally accepted in the
United 5tates of &merica. +hose standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement.
&n audit includes examinin', on a test basis, evidence supportin' the amounts and disclosures
in the financial statements. &n audit also includes assessin' the accountin' principles used and
si'nificant estimates made by mana'ement, as well as evaluatin' the overall financial
statement presentation. 3e believe that our audit provides a reasonable basis for our opinion.
+he company has included in property and debt in the accompanyin' balance sheet
certain lease obli'ations that, in our opinion, should be expensed in order to conform with
'enerally accepted accountin' principles. If these lease obli'ations were capitali,ed, property
would be decreased by H0,<<<,<<<, lon'-term debt by H*,<<<,<<<, and retained earnin's by
H%:<,<<< as of =ctober /%, *<<2, and net income and earnin's per share would be decreased
by H%:<,<<< and H.6*, respectively, for the year then ended.
Required
$omplete the above qualified audit report by preparin' the opinion para'raph. Ao not date or
si'n the report.
&nswer:
In our opinion, except for the effects of capitali,in' lease obli'ations, as discussed in the
precedin' para'raph, the financial statements referred to above present fairly, in all
material respects, the financial position of +amara. $orporation as of =ctober /%, *<<8,
and the results of its operations and its cash flows for the year then ended in conformity
with 'enerally accepted accountin' principles.
/-%:
;%. !ublic"
medium
+he followin' is a portion of a qualified scope and opinion report due to a scope restriction.
Note: & separate report was issued on the effectiveness of internal control over financial
reportin'."
Independent Auditors Report
+o the shareholders of Bast +imes $orporation
3e have audited the accompanyin' balance sheet of Bast +imes $orporation as of 5eptember
/<, *<<8, and the related statements of income, retained earnin's, and cash flows for the year
then ended. +hese financial statements are the responsibility of the company-s mana'ement.
=ur responsibility is to express an opinion on these financial statements based on our audit.
7xcept as discussed in the followin' para'raph, we conducted our audit in accordance with the
standards of the !ublic $ompany &ccountin' =versi'ht >oard United 5tates". +hose standards
require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. &n audit includes examinin', on a test
basis, evidence supportin' the amounts and disclosures in the financial statements. &n audit
also includes assessin' the accountin' principles used and si'nificant estimates made by
mana'ement, as well as evaluatin' the overall financial statement presentation. 3e believe that
our audit provides a reasonable basis for our opinion.
3e were unable to obtain audited financial statements supportin' the company-s investment in
a forei'n affiliate stated at H%,<0<,<<<, or its equity in earnin's of that affiliate of H2<%,<<<,
which is included in net income, as described in Note %0 to the financial statements. >ecause
of the nature of the company-s records, we were unable to satisfy ourselves as to the carryin'
value of the investment or the equity in its earnin's by means of other auditin' procedures.
Required
$omplete the above report by preparin' the opinion para'raph. Ao not date or si'n the report.
&nswer:
In our opinion, except for the effects of such ad@ustments, if any, as mi'ht have been
determined to be necessary had we been able to examine evidence re'ardin' the forei'n
affiliate investment and earnin's, the financial statements referred to above present fairly,
in all material respects, the financial position of Bast +imes $orporation as of 5eptember
/<, *<<8, and the results of its operations and its cash flows for the year then ended in
conformity with 'enerally accepted accountin' principles.
/-%;
;*.
medium
?our $!& firm has completed the fieldwor. for the *<<8 audit of 5harp $orporation, a private
company with an =ctober year-end. ?ou were preparin' to draft a standard, unqualified audit
report when you discovered that the audit mana'er on the 5harp en'a'ement owns %< shares
of 5harp-s common stoc.. !repare the appropriate report.
&nswer:
3e are not independent with respect to 5harp $orporation, and the accompanyin'
balance sheet as of =ctober /%, *<<8, and the related statements of income, retained
earnin's, and cash flows for the year then ended were not audited by us. &ccordin'ly, we
do not express an opinion on them.
Note: +here is no report title when the auditor issues a disclaimer due to a lac. of
independence.
;/.
challen'in'
Aescribe the standard unqualified report to be issued for an audit of a private company. >e'in
by specifyin' the seven parts of the report, and then discuss the contents of each part.
&nswer:
+he parts of the standard unqualified report are as follows:
Report title. +he title must include the word (independent.) 7xamples of
appropriate titles are (independent auditor-s report,) or (report of independent
accountant.)
Report address! +he report is usually addressed to the company-s stoc.holders or
board of directors. It should not be addressed to company mana'ement.
"ntroductory paragraph. +here are three important components of the introductory
para'raph. Birst, it states that an audit was performed. 5econd, it lists the financial
statements that were audited and their dates. +hird, it states that mana'ement is
responsible for the financial statements, and that the auditor is responsible for
expressin' an opinion on those statements based on an audit.
Scope paragraph. +he scope para'raph is a factual statement about what was done
durin' the audit. It first states that auditin' standards 'enerally accepted in the
United 5tates of &merica were followed by the auditor. It then states that an audit is
desi'ned to obtain reasonable assurance about whether the statements are free of
material misstatement. It concludes by statin' that the auditor evaluated the
appropriateness of the accountin' principles used, and estimates made, by
mana'ement, and of the financial statement disclosures and presentations 'iven.
#pinion paragraph. +his para'raph states the auditor-s opinion concernin' whether
the financial statements present fairly the client-s financial position and results of its
operations and cash flows in conformity with 'enerally accepted accountin'
principles!
$ame of %PA firm. +ypically, the name of the $!& firm, and not the name of an
individual auditor, is used.
Audit report date. +he audit report is normally dated as of the last day of fieldwor..
/-*<
;0.
challen'in'
!resented below is an independent auditor-s report for a private company prepared by the firm
of Iarrin'ton and !erry, CC!.
Auditors Report
+o the president and mana'ement
of 7!#, Inc.
3e have examined the accompanyin' balance sheets and statements of income, retained
earnin's, and cash flows of 7!#, Inc., as of Aecember /%, *<<8 and *<<6. 3e performed our
examination in accordance with auditin' standards 'enerally accepted in the United 5tates of
&merica and examined, on a test basis, evidence supportin' the accountin' principles used and
estimates made by mana'ement.
In our opinion, the financial statements referred to above accurately present the financial
position of 7!#, Inc., in conformity with 'enerally accepted accountin' principles.
Iarrin'ton and !erry, CC!
Aecember /%, *<<8
#ther information:
7!#, Inc., is a for-profit corporation and publishes comparative financial statements for
distribution to shareholders, potential investors, and the 'eneral public. +he client has a
calendar year-end. Bor the most recent audit, the auditor completed all si'nificant fieldwor. on
#arch 2, *<<: and issued the audit report on #arch %6, *<<:. Aurin' *<<8, 7!# chan'ed its
method of depreciatin' lon'-term assets and properly reflected the effect of the chan'e in the
current year-s financial statements, restated the prior year-s financial statements, and properly
discussed the chan'e in a footnote Note 0" to those statements. +he auditors are satisfied that
the chan'e was preferable.
Required:
$onsider all the facts 'iven and rewrite the complete auditor-s report, includin' report title,
address, body of report, name of firm, and audit report date.
/-*%
&nswer:
Independent Auditors Report
+o the shareholders of 7!#, Inc.
3e have audited the accompanyin' balance sheets of 7!#, Inc., as of Aecember /%, *<<8 and
*<<6, and the related statements of income, retained earnin's, and cash flows for the years
then ended. +hese financial statements are the responsibility of the company-s mana'ement.
=ur responsibility is to express an opinion on these financial statements based on our audits.
3e conducted our audits in accordance with auditin' standards 'enerally accepted in the
United 5tates of &merica. +hose standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement.
&n audit includes examinin', on a test basis, evidence supportin' the amounts and disclosures
in the financial statements. &n audit also includes assessin' the accountin' principles used and
si'nificant estimates made by mana'ement, as well as evaluatin' the overall financial
statement presentation. 3e believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects,
the financial position of 7!#, Inc., as of Aecember /%, *<<8 and *<<6, and the results of its
operations and its cash flows for the years then ended in conformity with 'enerally accepted
accountin' principles.
&s discussed in Note 0 to the financial statements, 7!#, Inc., chan'ed its method of
computin' depreciation in *<<8.
Iarrin'ton and !erry, CC!
#arch 2, *<<:
/-**
;2.
challen'in'
=n &pril %0, *<<:, your $!& firm completed the fieldwor. for the audit of =-#alley
$orporation-s financial statements for the year ended Aecember /%, *<<8. =-#alley is a
privately held company. Cast year, your firm expressed an unqualified opinion on =-#alley-s
*<<6 financial statements.
>arrett and =-$onnor, $!&s, performed the audit of the Aecember /%, *<<8 and *<<6
financial statements of +om-s 5upply $ompany, a consolidated subsidiary of =-#alley-s.
>arrett and =-$onnor completed the fieldwor. on Bebruary *2, *<<:, and issued its
unqualified opinion on +om-s 5upply $ompany on #arch *, *<<:. +om-s statements reflect
total assets of H;2<,<<< and H;<<,<<< as of Aecember /%, *<<8 and *<<6, respectively, and
revenues of H%,:02,<<< and H%,62<,<<< for the years then ended.
Aurin' your audit, you obtained the followin' information which does not appear in the
footnotes to =-#alley-s *<<8 financial statements:
Aurin' *<<8, =-#alley chan'ed its method of valuin' inventory from the Birst-In-Birst-
=ut method to the Cast-In-Birst-=ut method. =-#alley-s mana'ement believes the
chan'e provides a better matchin' of revenues and expenses, with which you concur. +he
chan'e reduced endin' inventory in *<<8 by H*0:,<<< and net income by H%*;,<<<. +he
effect of the chan'e on *<<8 is considered material, but not hi'hly material. +he effect of
the chan'e on prior years is immaterial.
Required
!repare the shared audit report to accompany =-#alley-s *<<8-*<<6 comparative financial
statements. Include the report title, address, body, date, and your si'nature.
/-*/
&nswer:
Independent Auditors Report
+o the >oard of Airectors of =-#alley $orporation:
3e have audited the accompanyin' consolidated balance sheets of =-#alley $orporation
as of Aecember /%, *<<8 and *<<6 and the related consolidated statements of income, retained
earnin's, and cash flows for the years then ended. +hese financial statements are the
responsibility of the company-s mana'ement. =ur responsibility is to express an opinion on
these financial statements based on our audit. 3e did not audit the financial statements of
+om-s 5upply $ompany, a consolidated subsidiary, which statements reflect total assets of
H;2<,<<< and H;<<,<<< as of Aecember /%, *<<8 and *<<6, respectively, and total revenues of
H%,:02,<<< and H%,62<,<<< for the years then ended. +hose statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it relates to the
amounts included for +om-s 5upply $ompany, is based solely on the report of the other
auditors.
3e conducted our audits in accordance with auditin' standards 'enerally accepted in the
United 5tates of &merica. +hose standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement.
&n audit includes examinin', on a test basis, evidence supportin' the amounts and disclosures
in the financial statements. &n audit also includes assessin' the accountin' principles used and
si'nificant estimates made by mana'ement, as well as evaluatin' the overall financial
statement presentation. 3e believe that our audits and the report of other auditors provide a
reasonable basis for our opinion.
Aurin' the year, =-#alley chan'ed its method of valuin' inventory from the first-in,
first-out method to the last-in, first-out method. +his chan'e was made because mana'ement
believes the chan'e provides a better matchin' of revenues and expenses. +he chan'e reduced
inventory at Aecember /%, *<<8, by H*0:,<<< and net income for *<<8 by H%*;,<<<. +he effect
of the chan'e on prior years is immaterial. In our opinion, disclosure of this chan'e is required
to conform with 'enerally accepted accountin' principles.
In our opinion, based on our audits and the report of other auditors, except for not
disclosin' the chan'e in inventory valuation methods discussed in the precedin' para'raph,
the financial statements referred to above present fairly, in all material respects, the financial
position of =-#alley $orporation as of Aecember /%, *<<8 and *<<6, and the results of its
operations and its cash flows for the years then ended in conformity with 'enerally accepted
accountin' principles.
&pril %0, *<<: Name of student-s $!& firm"
=ther =b@ective &nswer Bormat Questions
/-*0
;6.
medium
&ssume you are the partner in char'e of the *<<8 audit of >ec.er $orporation, a private
company. +he audit report has not yet been prepared. In each independent situation followin'
%-:", indicate the appropriate action a-'" to be ta.en. +he possible actions are as follows:
a. Issue a standard unqualified report.
b. Qualify both the scope and opinion para'raphs.
c. Qualify the opinion para'raph.
d. Issue an unqualified opinion with an explanatory para'raph.
e. Issue an unqualified opinion with modified wordin' no explanatory para'raph".
f. Issue an adverse opinion.
'. Aisclaim an opinion.
+he situations are as follows:
f %. >ec.er $orporation carries its property, plant, and equipment accounts at
current mar.et values. $urrent mar.et values exceed historical cost by a hi'hly
material amount, and the effects are pervasive throu'hout the financial
statements.
' *. #ana'ement of >ec.er $orporation refuses to allow you to observe, or ma.e,
any counts of inventory. +he recorded boo. value of inventory is hi'hly
material.
/-*2
a /. ?ou were unable to confirm accounts receivable with >ec.er-s customers.
Iowever, because of detailed sales and cash receipts records, you were able to
perform reliable alternative audit procedures.
' 0. =ne wee. before the end of fieldwor., you discover that the audit mana'er on
the >ec.er en'a'ement owns a material amount of >ec.er-s common stoc..
e 2. ?ou relied upon another $!& firm to perform part of the audit. &lthou'h you
were the principal auditor, the other firm audited a material portion of the
financial statements. ?ou wish to refer to but not name" the other firm in your
report.
d or ' 6. ?ou have substantial doubt about >ec.er-s ability to continue as a 'oin'
concern.
d 8. >ec.er $orporation chan'ed its method of computin' depreciation in *<<8.
?ou concur with the chan'e and the chan'e is properly disclosed in the
financial statement footnotes.
c :. +en days after the balance sheet date, one of >ec.er-s buildin's was destroyed
by a fire. >ec.er refuses to disclose this information in a footnote to the
financial statements, but you believe disclosure is required to conform with
9&&!. +he amount of the uninsured loss was material, but not hi'hly material.
;8. !ublic"
easy
b
&udit reports issued for financial statements of a public company should refer to 'enerally
accepted auditin' standards in the scope para'raph.
a. +rue
b. Balse
;:.
easy
a
&udit reports issued for financial statements of a private company should refer to 'enerally
accepted auditin' standards in the scope para'raph.
a. +rue
b. Balse
;;.
easy
a
If an audit client has not consistently observed accountin' principles in the current period in
relation to the precedin' period, the auditor should normally issue an unqualified report with
an explanatory para'raph which explains the nature of the chan'e.
a. +rue
b. Balse
%<<.
easy
b
& qualified report is issued when all auditin' conditions have been met, no si'nificant
misstatements have been discovered, and it is the auditor-s opinion that the financial
statements are fairly stated in accordance with 9&&!.
a. +rue
b. Balse
%<%.
easy
b
+he audit report is normally addressed to the company-s president or chief executive officer.
a. +rue
b. Balse
/-*6
%<*.
easy
a
+he phrase ('enerally accepted accountin' principles) can be found in the opinion para'raph
of a standard unqualified report.
a. +rue
b. Balse
%</. !ublic"
medium
b
&uditors of public company financial statements must issue separate reports on internal control
over financial reportin'.
a. +rue
b. Balse
%<0.
medium
b
$han'es in an estimate, such as a chan'e in the estimated useful life of an asset for
depreciation purposes, affect consistency but not comparability, and therefore require an
explanatory para'raph in the audit report.
a. +rue
b. Balse
%<2.
medium
b
3hen an auditor decides that adherence to 9&&! would result in misleadin' financial
statements, the auditor has no choice but to issue a qualified audit report.
a. +rue
b. Balse
%<6. !ublic"
medium
b
+he phrase (auditin' standards 'enerally accepted in the United 5tates of &merica) can be
found in the opinion para'raph of a standard, unqualified audit report for a public company.
a. +rue
b. Balse
%<8.
medium
b
&uditors should issue a disclaimer of opinion when there is a hi'hly material scope restriction
caused by the client.
a. +rue
b. Balse
%<:.
medium
a
3henever an auditor issues a qualified report, he or she must use the term (except for) in the
opinion para'raph.
a. +rue
b. Balse
%<;.
medium
b
3henever an auditor issues a qualified report, he or she must use the term (sub@ect to) in the
opinion para'raph.
a. +rue
b. Balse
%%<.
medium
b
3henever an auditor discovers a hi'hly material 9&&! violation in the financial statements
that the client refuses to correct, the auditor should issue a disclaimer of opinion.
a. +rue
b. Balse
%%%.
medium
b
3hen there is a scope limitation in an audit, the audit report will be unqualified, qualified
scope and opinion, or adverse, dependin' on the materiality of the scope limitation.
a. +rue
b. Balse
/-*8
%%*.
medium
b
$han'es in reportin' entities, such as the inclusion of an additional company in combined
financial statements, affect comparability but not consistency, and therefore do not require an
explanatory para'raph in the audit report.
a. +rue
b. Balse
%%/.
medium
b
3hen a qualified opinion is issued, an explanatory para'raph is added immediately after the
opinion para'raph to explain the nature of the qualification that affects the opinion.
a. +rue
b. Balse
%%0.
medium
a
If an audit client has not consistently applied accountin' principles, and the auditor does not
concur with the appropriateness of the chan'e, either an unqualified, a qualified, or an adverse
opinion should be issued, dependin' on the materiality level involved.
a. +rue
b. Balse
%%2.
medium
a
3hen an auditor relies upon a different $!& firm to perform part of the audit and chooses to
issue a shared opinion, the wordin' of the report should be modified in all three para'raphs.
a. +rue
b. Balse
%%6.
medium
b
&n auditor should issue a qualified opinion with an explanatory para'raph whenever there is a
material uncertainty affectin' the financial statements.
a. +rue
b. Balse
%%8.
medium
b
+he phrase (+he audit is desi'ned to obtain reasonable assurance about whether the statements
are free of material misstatements) is included in the introductory para'raph of an audit
report.
a. +rue
b. Balse
%%:.
challen'in'
b
If an auditor is not independent and the auditor .nows that the company has not followed
9&&!, the auditor should immediately disclaim an opinion and not mention the departure
from 9&&! in the audit report.
a. +rue
b. Balse
/-*: