1. When an auditor encounters a situation involving more than one of the conditions requiring a departure from a standard unqualified report, the auditor should modify his or her opinion for each condition unless one has the effect of neutralizing the others. In which of the following situations would the auditor not include more than one modification in the report?
a. There is a
material scope limitation, and the auditor is not independent.
b. There is a
material GAAP violation, and the auditor is not independent.
c. There is a
material scope limitation, and there is substantial doubt about the company's ability
to continue as a going concern.
d. There is a
substantial doubt about the company's ability to continue as a going concern,
and information about the causes of the uncertainties is not adequately
disclosed in a footnote.
2. Which of the following requires
recognition in the auditor's opinion as to consistency?
a. The
correction of an error in the prior year's financial statements resulting from
a mathematical mistake in capitalizing interest.
b. A change in
the estimate of provisions for warranty costs.
c. The change
from the cost method to the equity method of accounting for investments in
common stock.
d. A change in
depreciation method which has no effect on current year's financial statements
but is certain to affect future years.
3. Grant Company's financial statements
adequately disclose uncertainties that concern future events, the outcome of
which are not reasonably estimable. The auditor's report should include a(an)
a. unqualified
opinion.
b. "subject
to" qualified opinion.
c. "except
for" qualified opinion.
d. adverse
opinion.
4. Which of the following statements is
not true?
a. A
one-paragraph report is generally used when the auditor is not independent.
b. A
three-paragraph report ordinarily indicates there are no exceptions in the
audit.
c. More than
three paragraphs in the report indicates there must be some type of
qualification in the audit.
d. An
unqualified opinion with an explanation or modified wording would require more
than three paragraphs.
5. Which
of the following is not one of the principal CPA firm's alternatives when
issuing a report if a different CPA firm performed part of the audit?
a. Issue a
joint report signed by both CPA firms.
b. Make no
reference to the other CPA firm in the audit report, and issue the standard
unqualified opinion.
c. Make
reference to the other auditor in the report by using modified wording. (A
shared opinion or report.)
d. A qualified
opinion or disclaimer, depending on materiality, is required if the principal
auditor is not willing to assume any responsibility for the work of the other
auditor.
6. Which of the following is not a cause
of an explanatory paragraph or modified wording to be added to the standard
unqualified report?
a. Emphasis of
a matter.
b. Reports
involving other auditors.
c. Auditor
disagrees with client's departure from GAAP.
d. Lack of
consistent application of GAAP.
7. The "unqualified report with
explanatory paragraph" and the "unqualified report with modified
wording"
a. arise as a
result of an incomplete audit.
b. arise when
the financial statements are not quite "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.
8. When the client fails to make adequate
disclosure in the body of the statements or in the related footnotes, it is the
responsibility of the auditor to
a. inform the
reader that disclosure is not adequate, and to issue a qualified or an adverse
opinion.
b. inform the
reader that disclosure is not adequate, and to issue an unqualified or
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.
9. When the misstatements are so material
or pervasive that an adverse opinion is required, the scope paragraph would
a. be
qualified.
b. still be unqualified.
c. be deleted.
d. be expanded
to identify the additional procedures which the auditor performed.
10. When
the auditor cannot perform procedures and the amounts are so material that a
disclaimer of opinion rather than a qualified opinion is required,
a. the opinion
paragraph will state "does not present fairly."
b. the opinion
paragraph will state "presents fairly."
c. the scope
paragraph will be unchanged from the standard unqualified opinion.
d. the scope
paragraph will be deleted.
11. Whenever the client imposes restrictions
on the scope of the audit, the auditor should be concerned about the
possibility that management is trying to prevent discovery of misstated
information. In such cases, the AICPA has encouraged
a. a disclaimer
of opinion, in all cases.
b. a
qualification of both scope and opinion, in all cases.
c. a disclaimer
of opinion, whenever materiality is in question.
d. a
qualification of both scope and opinion, whenever materiality is in question.
12. CPAs issue several types of
"special audit reports." Which of the following circumstances would
not require the issuance of a special audit report?
a. The client's
financial statements are prepared using the cash basis.
b. The client's
financial statements are prepared using the accrual basis.
c. The CPA has
been retained to audit only the current assets.
d. The CPA has
been retained to review the internal control system, not the financial
statements.
13. Which of the following is not a primary
category of attestation report?
a. Compilation
report.
b. Review
report.
c. Audit
report.
d. Special
audit report based on a basis of accounting other than generally accepted
accounting principles.
14. Most auditors believe that financial
statements are "presented fairly" when the statements are in
accordance with generally accepted accounting principles, but that it is also
necessary to
a. determine
that they are not in violation of FASB statements.
b. examine the
substance of transactions and balances for possible misinformation.
c. review the
statements using the accounting principles promulgated by the Securities and
Exchange Commission.
d. assure
investors that the net income reported this year will be equaled or exceeded in
the future.
15. In
which of the following situations would the auditor most likely issue an
unqualified report?
a. The client
valued ending inventory by using the replacement cost method.
b. The client
valued ending inventory by using the Next-In-First-Out (NIFO) method.
c. The client
valued ending inventory at selling price rather than historical cost.
d. The client
valued ending inventory by using the First-In-First-Out (FIFO) method but
showed the replacement cost of inventory in the Notes to the Financial
Statements.
16. Which of the following statements is
true?
a. The auditor
is required to issue a disclaimer of opinion in the event of a material
uncertainty.
b. The auditor
is required to issue a disclaimer of opinion in the event of a going concern
problem.
c. The auditor
is required to issue a disclaimer of opinion for a material uncertainty and for
a going concern problem.
d. The auditor
has the option, but is not required, to issue a disclaimer of opinion for a
material uncertainty or for a going concern problem.
17. A qualified report cannot take the form
of a qualification of
a. the opinion
alone.
b. the scope
alone.
c. both the
scope and opinion.
d. all of the
above.
18. Dennen, CPA, is the principal auditor
for a multi-national corporation. Another CPA has examined and reported on the
financial statements of a significant subsidiary of the corporation. Dennen is
satisfied with the independence and professional reputation of the other
auditor, as well as the quality of the other auditor's examination. With
respect to Dennen's report on the consolidated financial statements, taken as a
whole, Dennen
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 Dennen must include in the
auditor's report on the consolidated financial statements a qualified opinion
with respect to the examination of the other auditor.
19. The primary concern in measuring
materiality when a client has failed to follow GAAP is usually
a. the total dollar
error in the accounts involved, compared with some base.
b. measurability
of the dollar error.
c. the nature
of the item in error.
d. whether it
can materially affect some future period.
20. The
most common case in which conditions beyond the client's and auditor's control
cause a scope restriction is an engagement
a. agreed upon
after the client's balance sheet date.
b. where the
client won't allow the auditor to confirm receivables for fear of offending its
customers.
c. where the
auditor doesn't have enough staff to satisfactorily audit all of the client's
foreign subsidiaries.
d. where the
client is going through Chapter 11 bankruptcy.
21. When financial statements of a prior
period are presented on a comparative basis with financial statements of the
current period, the continuing auditor is responsible for
a. expressing
dual dated opinions.
b. updating the
report on the previous financial statements only if there has not been a change
in the opinion.
c. updating the
report on the previous financial statements only if the previous report was
qualified and the reasons for the qualification no longer exist.
d. updating the
report on the previous financial statements regardless of the opinion previously
issued.
22. The use of a qualification of the
opinion alone is restricted to those situations in which the
a. scope of the
auditor's examination has been restricted.
b. financial
statements have not been prepared in accordance with generally accepted
accounting principles (GAAP).
c. auditor is
not independent.
d. auditor was
hired to do a "review" or "compilation."
23. A company has changed its method of
inventory valuation from an unacceptable one to one in conformity with
generally accepted accounting principles. The auditor's report on the financial
statements of the year of the change should include
a. no reference
to consistency.
b. a reference
to a prior period adjustment in the opinion paragraph.
c. an
explanatory paragraph that justifies the change and explains the impact of the
change on reported net income.
d. an
explanatory paragraph explaining the change.
24. Which of the following representations
does an auditor make explicitly and which implicitly when issuing an
unqualified opinion?
Conformity Adequacy of
with GAAP disclosure
a. Explicitly Explicitly
b. Implicitly Implicitly
c. Implicitly Explicitly
d. Explicitly Implicitly
25. When
there is a significant change in accounting principle, an auditor's report
should refer to the lack of consistency in
a. the scope
paragraph.
b. an
explanatory paragraph between the second paragraph and the opinion paragraph.
c. the opinion
paragraph.
d. an
explanatory paragraph following the opinion paragraph.
26. An auditor may not issue a qualified
opinion when
a. a scope
limitation prevents the auditor from completing an important audit procedure.
b. the
auditor's report refers to the work of a specialist.
c. the auditor
lacks independence with respect to the audited entity.
d. an
accounting principle at variance with generally accepted accounting principles
is used.
27. For the report containing a disclaimer
for lack of independence, the disclaimer is in the
a. third or
opinion paragraph.
b. second or
scope paragraph.
c. first and
only paragraph.
d. fourth or
explanatory paragraph.
28. When a qualified or adverse opinion is
issued, the qualifying paragraph is inserted
a. between the
introductory and scope paragraphs.
b. between the
scope and opinion paragraphs.
c. after the
opinion paragraph, as a fourth paragraph.
d. immediately
after the address, as the first paragraph.
29. When the auditor concludes that there is
substantial doubt about the entity's ability to continue as a going concern,
the appropriate audit report would be
a. an
unqualified opinion with an explanatory paragraph.
b. a qualified
opinion with an explanatory paragraph.
c. an adverse
opinion with an explanatory paragraph.
d. an
unqualified opinion with no explanatory paragraphs.
30. When
there is uncertainty about a company's ability to continue as a going concern, the
auditor's concern is the possibility that the client may not be able to
continue its operations or meet its obligations for a "reasonable period
of time." For this purpose, a reasonable period of time is considered not
to exceed
a. six months
from the date of the financial statements.
b. six months
from the date of the audit report.
c. one year
from the date of the financial statements.
d. one year
from the date of the audit report.
31. Whenever there is a scope restriction,
the appropriate response is to issue
a. a disclaimer
of opinion.
b. an adverse
opinion.
c. a qualified
opinion.
d. an
unqualified report, a qualification of scope and opinion, or a disclaimer,
depending on materiality.
32. The least severe type of report for
disclosing departures from an unqualified report is the
a. qualified
opinion.
b. disclaimer
of opinion.
c. adverse
opinion.
d. report on
unaudited financial statements.
33. Statements on Auditing Standards require
that a report be issued whenever a CPA firm
a. performs an
audit.
b. is engaged
to perform any services of any nature.
c. does
SEC-regulated work.
d. is
associated with financial statements.
34. A CPA firm is "associated with the
financial statements" of its client
a. only when it
does a financial audit.
b. only when it
does attestation services, such as a review or an audit.
c. even if a
CPA firm only assists a client in preparing financial statements but does not
do an audit.
d. if it
performs any services at all for the client.
35. A
scope and opinion qualification can be issued only when the auditor
a. is not
independent.
b. has not been
able to accumulate all the evidence required by generally accepted auditing
standards.
c. has accumulated
all the evidence required by generally accepted auditing standards.
d. has been
restricted by the client from gathering the information needed to form an
opinion.
36. The AICPA Council designated the
following bodies as those which, in the past, had the power to promulgate
"generally accepted accounting principles":
1. Bulletins issued by the
Accounting Research Board.
2. Opinions issued by the
Accounting Principles Board.
3. Statements issued by the
Financial Accounting Standards Board.
Which of the bodies are still recognized by Council as authoritative GAAP
setters?
a. Number 3
only.
b. Numbers 2
and 3.
c. Numbers 1
and 3.
d. Numbers 1,
2, and 3.
37. The client has presented all required
financial statements with the exception of the statement of cash flows. The
auditor has completed the audit and is satisfied that everything, with the
exception of the missing statement, is presented fairly. According to SAS No.
58, the auditor
a. may issue
either an unqualified or a qualified opinion.
b. must issue
an adverse opinion.
c. may issue an
unqualified opinion.
d. must issue a
qualified opinion.
38. Whenever an auditor issues a qualified
opinion, the implication is that the auditor
a. does not
know if the statements are presented fairly.
b. does not
believe the statements are presented fairly.
c. is satisfied
that the statements are presented fairly.
d. is satisfied
that the statements are presented fairly "except for" a specific
aspect of them.
39. Which of the following reports would not
use "auditing standards" as its source of authoritative support?
a. Audit report
for the audit of Ford Motor Company's financial statements.
b. Special
audit report for the audit of The Olive Garden's ending balance in inventory.
(The Olive Garden is a publicly-traded company.)
c. Review
report for the review of The Olive Garden's quarterly financial statements.
d. Attestation
report for the attestation of Ford Motor Company's forecasted financial
statements.
40. The
introductory paragraph of the standard audit report states that the financial
statements and the opinion expressed about those statements are
a. the
responsibility of the auditor.
b. the
responsibility of management.
c. the joint responsibility
of management and the auditor.
d. none of the
above.
41. If inventory is the largest balance on
the financial statements, a large misstatement would be so material that the
auditor should issue
a. an
unqualified opinion.
b. a qualified
opinion.
c. an adverse
opinion.
d. a disclaimer
of opinion.
42. When a disclaimer is issued because the
auditor lacks independence,
a. no report
title is included on the report.
b. a
one-paragraph audit report is issued.
c. the only
reason cited for issuing the disclaimer is the lack of independence.
d. all of the
above are correct.
43. In the scope paragraph of the audit
report, the use of the term "reasonable assurance" is intended to
indicate that
a. no
misstatements exist in the financial statements.
b. no material
misstatements exist in the statements.
c. there is a
possibility that material misstatements still exist in the financial
statements.
d. there is a
possibility that immaterial misstatements still exist in the financial
statements.
44. When the client's financial statements
are misstated by a highly material amount, the auditor should issue
a. an adverse
opinion.
b. a disclaimer
of opinion.
c. either a
qualified opinion or an adverse opinion, depending on which conditions exist.
d. either a
qualified opinion or an unqualified opinion with modified wording, depending on
which conditions exist.
45. In
a qualified, adverse, or disclaimer report, the auditor
a. has not
performed a satisfactory audit.
b. is not
satisfied that the financial statements are presented fairly.
c. either a or
b.
d. none of
these.
46. When the client has not been consistent
in applying GAAP from year one to year two and the auditor does not concur with
the appropriateness of the change, the auditor will issue a(n)
a. disclaimer.
b. adverse
opinion.
c. unqualified
opinion.
d. qualified
opinion.
47. If the auditor is determined to lack
independence, a disclaimer of opinion must be issued
a. if the client
requests it.
b. only if it
is highly material.
c. only if it
is material but not highly material.
d. in all
cases.
48. The audit report indicates that (1)
management is responsible for the content of the financial statements and (2)
the auditor is responsible for evaluating the appropriateness of the accounting
principles chosen by management. Which paragraph contains those statements?
a. Both are in
the introductory paragraph.
b. Both are in
the scope paragraph.
c. Both are in
the opinion paragraph.
d. None of the
above is true.
49. Which of the following is not a true
statement? "In the opinion paragraph of the standard unqualified report,
the auditor is required to state
a. that the
financial statements are presented fairly."
b. a conclusion
about whether the company followed generally accepted accounting principles
during the period under audit."
c. whether
management has or has not made adequate disclosure."
d. an opinion
about the financial statements taken as a whole."
50. Misstatements
must be compared with some measurement base before a decision can be made about
the materiality of the failure to follow GAAP. A commonly accepted measurement
base would be
a. net income.
b. total assets.
c. working
capital.
d. all of the
above.
51. Which of the following is not a change
which affects consistency and, therefore, does not require an explanatory
paragraph?
a. Change in
accounting principle, such as a change from LIFO to FIFO.
b. Change in
reporting entity, such as the inclusion of an additional company in combined
financial statements.
c. Change in an
estimate, such as a decrease in the life of an asset for depreciation purposes.
d. Correction
of errors by changing from non-GAAP to GAAP.
52. Items that materially affect the
comparability of financial statements generally 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.
53. When comparing misstatements with a
measurement base, the auditor must consider the pervasiveness of the
misstatement. An example of a pervasive misstatement would be
a. an understatement
of inventory, caused by miscounting.
b. an
understatement of retained earnings, caused by a miscalculation of dividends
payable.
c. a
misclassification of notes payable as a long-term liability when it should be
current.
d. a
misclassification of salary expense as a selling expense when it should be
allocated equally to both selling and administrative expense.
54. If the balance sheet of a non-SEC
company is dated December 31, 2000, the audit report is dated March 6, 19X2,
and both are released to the public on March 15, 2001, this indicates that the
auditor has searched for material unrecorded transactions and events that
occurred up to
a. December 31,
2000.
b. March 6,
2001.
c. March 15,
2001.
d. none of
these.
55. The
necessity to issue a disclaimer of opinion may arise because of
a. a severe
limitation on the scope of the audit examination.
b. a
nonindependent relationship between auditor and client.
c. either a or
b above.
d. none of the above.
56. The dollar amount of some misstatements
cannot be accurately measured. For example, if the client were unwilling to
disclose an existing lawsuit, the auditor must estimate
a. its effect
on net income.
b. its effect
on users of the financial statements.
c. its effect
on the auditor's exposure to lawsuits.
d. its effect
on management's future decisions.
57. Auditors sometimes encounter situations
in which the outcome of a matter cannot be reasonably estimated at the time the
financial statements are issued. These matters are referred to as
a. unestimable
matters.
b. non
sequiturs.
c. uncertainties.
d. in suspense
matters.
58. Three of the paragraphs of the report
modified for uncertainties are the same as the standard unqualified report. The
explanatory paragraph which describes the uncertainty is added as the
a. first
paragraph.
b. fourth and
last paragraph.
c. third
paragraph with the opinion paragraph last.
d. second
paragraph with the opinion paragraph last.
59. Of the two major categories of scope
restrictions, (1) those caused by client and (2) those caused by conditions
beyond the control of either client or auditor, the effect on the auditor's
report
a. is the same
for either.
b. is more
serious for 1 than for 2.
c. is more serious
for 2 than for 1.
d. is
negligible.
60. Both
disclaimers and adverse opinions are used
a. only when
the condition is highly material.
b. whether the
condition is material or not.
c. regardless
of the auditor's independence.
d. regardless
of client's choice of a non-GAAP accounting method.
61. Auditing standards require that the
audit report must be titled and that the title must
a. include the
word "independent."
b. indicate
whether the auditor is a CPA.
c. indicate
whether the auditor is a proprietorship, partnership, or incorporated.
d. not include
any discriminatory language.
62. If a misstatement is immaterial relative
to the financial statements of the entity for the current period and is not expected
to have a material effect in future periods, it is appropriate to issue
a. an
unqualified opinion.
b. a qualified
opinion.
c. an adverse
opinion.
d. a disclaimer
of opinion.
63. To emphasize the fact that the auditor
is independent, the addressee of the audit report is usually
a. the client
company.
b. the
stockholders of the client company.
c. the
President and/or CEO of client company.
d. the board of
directors of client company.
64. When a misstatement in the financial statements
would affect a user's decision but the overall statements are still fairly
stated, it would be appropriate to issue
a. a qualified
opinion.
b. an
unqualified opinion.
c. an adverse
opinion.
d. a disclaimer
of opinion.
65. The
purpose of the introductory paragraph in the standard unqualified report is
a. to
distinguish the audit report from a compilation or review report.
b. to identify
the financial statements which were audited and the dates and time periods
covered by the report.
c. to
communicate the responsibilities of management in preparing the financial
statements and to clarify the respective roles of management and the auditor.
d. all of the
above.
66. When determining whether an exception is
highly material, the extent to which the exception affects different parts of
the financial statements must be considered. This is referred to as
a. materiality.
b. pervasiveness.
c. financial
analysis.
d. ratio
analysis.
67. The scope paragraph of the standard
unqualified audit report states that the audit is designed to
a. discover all
errors and/or irregularities.
b. discover
material errors and/or irregularities.
c. conform to
generally accepted accounting principles.
d. obtain
reasonable assurance whether the statements are free of material misstatement.
68. When the auditor knows that the
financial statements may be misleading because they were not prepared in
conformity with generally accepted accounting principles, he or she must issue
a. a qualified
opinion.
b. an adverse
opinion.
c. a disclaimer
of opinion.
d. a qualified
or an adverse opinion, depending on the materiality of the item in question.
69. The appropriate date for the audit
report is the one on which the
a. client's
fiscal year ended.
b. auditor and
client entered into a contract.
c. auditor has
concluded procedures in the field.
d. auditor
types and delivers the report to client.
70. Should
a situation arise where all audit procedures considered necessary in the
circumstances were performed and the auditor would otherwise issue an
unqualified report, and then it was discovered that the auditor has not
fulfilled the independence requirements specified by the Code of
Professional Conduct, the audit report issued
a. may still be
the unqualified opinion.
b. must be a
disclaimer of opinion.
c. may be
either an unqualified or disclaimer of opinion.
d. must be an
adverse opinion.
71. The audit report date indicates
a. the last day
of the auditor's responsibility for the review of significant events that
occurred after the date of the financial statements.
b. the date on
which the financial statements were filed with the Securities and Exchange Commission.
c. the last
date on which users may institute a lawsuit against either client or auditor.
d. the last day
of the fiscal period.
72. The only unqualified opinion reports
which use modified wording are those involving
a. the use of
other auditors.
b. material
uncertainties.
c. substantial
doubt about going concern.
d. lack of
consistent application of GAAP.
73. As a result of management's refusal to
permit the auditor to physically examine inventory, the auditor has not
accumulated sufficient evidence to conclude whether financial statements are
stated in accordance with GAAP. The auditor must depart from the unqualified
audit report because
a. the
financial statements have not been prepared in accordance with GAAP.
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.
74. The second standard of reporting
requires the auditor to call attention to circumstances in which accounting
principles have not been consistently observed in the current period in
relation to the preceding period. Generally accepted accounting principles
require that changes in accounting principles be to
a. a more
conservative principle.
b. an equal or
better principle.
c. a preferable
principle.
d. a principle
permitted by the tax code.
75. An
adverse opinion is issued when the auditor believes
a. some parts of
the financial statements are materially misstated or misleading.
b. the
financial statements will be found to be misleading or misstated, if an
adequate investigation is performed.
c. the overall
financial statements are so materially misstated or misleading as a whole that
they do not present fairly the financial position or results of operations and
cash flows in conformity with GAAP.
d. the audit
firm is not independent.
76. Under certain circumstances, the CPA may
wish to emphasize specific matters regarding the financial statements even
though he or she intends to express an unqualified opinion. Normally, such
explanatory information should be
a. included in
the scope paragraph.
b. included in
a separate paragraph in the report.
c. included in the
opinion paragraph.
d. included in
the introductory paragraph.
77. A disclaimer is issued whenever the
auditor
a. believes
that some material part(s) of the financial statements are not presented
fairly.
b. believes
that the overall financial statements are not presented fairly.
c. has been
unable to satisfy him/herself that the financial statements are presented
fairly.
d. has
determined that the financial statements are presented fairly.
78. An auditor who issues a qualified
opinion because of an insufficiency of evidential matter should describe the
limitations in an explanatory paragraph. The auditor should also refer to the
limitation in the:
Scope Opinion Notes to the
paragraph paragraph financial statements
a. Yes No Yes
b. Yes Yes No
c. No Yes No
d. Yes Yes Yes
79. Whenever an auditor issues an
unqualified opinion, the implication is that the auditor
a. does not
know if the statements are presented fairly.
b. does not
believe the statements are presented fairly.
c. is satisfied
that the statements are presented fairly except for a specific aspect of them.
d. is satisfied
that the statements are presented fairly.
80. When
the audited financial statements of the prior year are presented together with
those of the current year, the continuing auditor's report should cover
a. both years.
b. only the current
year.
c. only the
current year, but the prior year's report should be presented.
d. only the
current year, but the prior year's report should be referred to.
81. Describe the standard unqualified
report. Begin by specifying the seven parts of the report, and then discuss the
contents of each part.
82. Discuss
the differences regarding how changes that affect consistency and changes that
affect comparability are referred to in the audit report. Give two examples of
each type of change.
83. There are five conditions that must be
met before an auditor can issue a standard unqualified report. Please discuss
each of these five conditions.
ANSWERS
1 - 10. a,
c, a, c, a, c, c, d, b, d
11 - 20. c,
b, a, b, d, d, b, c, a, a
21 - 30. d,
b, d, d, d, c, c, b, a, c
31 - 40. d,
a, d, c, b, d, d, d, d, d
41 - 50. c,
d, c, c,
c, d, d, d, d, d
51 - 60. c,
c, a, b, c, b, c, b, a, a
61 - 70. a,
a, b, a, d, b, d, d, c, b
71 - 80. a,
a, d, c, c, b, c, b, d, a
81. The parts of the standard unqualified
report are as follows:
ú Report title. The title must include the
word "independent." Examples of appropriate titles are
"independent auditor's report," or "report of independent
accountant."
ú Report address. The report is usually
addressed to the company's stockholders or board of directors. It should not be
addressed to company management.
ú Introductory paragraph. There are three
important components of the introductory paragraph. First, it states that an
audit was performed. Second, it lists the financial statements that were
audited and their dates. Third, it states that management is responsible for
the financial statements, and that the auditor is responsible for expressing an
opinion on those statements based on an audit.
ú Scope paragraph. The scope paragraph is
a factual statement about what was done during the audit. It first states that
generally accepted auditing standards were followed by the auditor. It then
states that an audit is designed to obtain reasonable assurance about whether
the statements are free of material misstatement. It concludes by stating that
the auditor evaluated the appropriateness of the accounting principles used,
and estimates made, by management, and of the financial statement disclosures
and presentations given.
ú Opinion paragraph. This paragraph states
the auditor's opinion concerning whether the financial statements present
fairly the client's financial position and results of its operations and cash
flows in conformity with generally accepted accounting principles.
ú Name of CPA firm. Typically, the name of
the CPA firm, and not the name of an individual auditor, is used.
ú Audit report date. The audit report is
normally dated as of the last day of fieldwork.
82. Material
lack of consistent application of GAAP should be disclosed by the auditor by
adding an explanatory paragraph after the unqualified opinion paragraph. The
explanatory paragraph should discuss the nature of the change and should refer
to the footnote in the financial statements that discusses the change. Changes
that affect comparability, but not consistency, require no such explanatory
paragraph in the audit report, assuming the change is disclosed in the
footnotes.
Examples of changes affecting consistency include changes in accounting principles, changes in reporting entities, and correction of errors involving accounting principles. Examples of changes affecting comparability, but not consistency, include changes in an estimate, error corrections not involving accounting principles, variations in the format and presentation of financial information, and changes because of substantially different transactions or events.
83. The five conditions that justify issuing
a standard unqualified report are:
ú All statementsÄÄbalance sheet, income
statement, statement of retained earnings, and statement of cash flowsÄÄare
included in the financial statements.
ú The three general standards of GAAS have been
followed in all respects on the engagement.
ú The three standards of fieldwork have been met.
ú The financial statements are presented in
accordance with generally accepted accounting principles.
ú There are no circumstances requiring the
addition of an explanatory paragraph or modification of the wording of the
report.
17. The
official answer is c, but a student refers to page 61 that the answer
should be b.
44. The
official answer is a, but the same student refers to page 53 that the
answer should be c.