Exam 3: Audit Reports

Changes in an estimate, such as a change in the estimated useful life of an asset for depreciation purposes, affect consistency but not comparability, and therefore require an explanatory paragraph in the audit report.

Under PCOAB auditing standards, the primary auditor issuing the opinion on the financial statements is called the

Misstatements must be compared with some measurement base before a decision can be made about materiality. A commonly accepted measurement base includes

Which of the following scenarios does not result in a qualified opinion?

When there is a lack of consistent application of GAAP due to a new accounting pronouncement, no explanatory paragraph is required.

The following is a portion of an adverse audit report issued for a public company. (Note: A separate report was issued on the effectiveness of internal control over financial reporting.) Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of Wallace Corporation We have audited the accompanying balance sheet of Wallace Corporation as of December 31, 2019, and the related statements of income, retained earnings, and cash flows for the year then ended. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. The company has excluded from property and debt in the accompanying balance sheet certain lease obligations that, in our opinion, should be capitalized in order to conform with generally accepted accounting principles. If these lease obligations were capitalized, property would be increased by $14,500,000, long-term debt by $13,200,000, and retained earnings by $1,300,000 as of December 31, 2019, and net income and earnings per share would be increased by $1,300,000 and $2.25, respectively, for the year then ended. Required: Complete the above adverse audit report by preparing the opinion paragraph. Do not date or sign the report.

When dealing with materiality and scope limitation conditions,

More than one modification should be included in the audit report when

An auditor should issue a qualified opinion with an explanatory paragraph whenever there is a material uncertainty affecting the financial statements.

The standard audit report for nonpublic entities refers to GAAS and GAAP in which sections?

Which of the following modifications of the auditor's report does not include an explanatory paragraph?

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

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 will most likely issue

A pervasive exception is one that affects different parts of the financial statements.

The Auditing Standards Board (ASB) sets auditing standards in the U.S. for nonpublic entities.

Management has recorded prepaid insurance as an asset in the previous year. This year, to reduce record-keeping costs, it expenses insurance. If the amount is immaterial to the financial statements,

A lack of independence will override any other scope limitations and requires a disclaimer of opinion.

The audit report date on a standard unmodified opinion audit report indicates

All of the following would require an emphasis of matter paragraph except for

There are three conditions necessitating a departure from an unqualified audit report. Name, discuss and state the appropriate audit report for each of these three conditions.