Exam 3: Audit Reports

When the auditor determines that the financial statements are fairly stated, but there is a nonindependent relationship between the auditor and the client, the auditor should issue

When comparing misstatements with a measurement base, the auditor must consider the pervasiveness of the misstatement. Of the following examples, the most pervasive misstatement is a(n)

In most audits, the auditor issues a(n)

A qualified report can take the form of a qualification of both the scope and the opinion or of the opinion alone.

An adverse opinion is issued when the auditor believes

The PCAOB expects that in most audits, the auditor will determine that at least one matter involved especially challenging, subjective, or complex auditor judgment.

The auditor's opinion paragraph of the auditor's report states that the auditor is responsible for the preparation, presentation and opinion on the financial statements.

Auditors should issue a disclaimer of opinion when there is a highly material client-imposed scope restriction.

If the financial statements include an income statement and a balance sheet but exclude the statement of cash flows, the auditors

Similar to AICPA standards, the new PCAOB standard requires the auditor to disclose critical audit matters in the auditor's report.

Audit situations 1 through 10 present various independent factual situations an auditor might encounter in conducting an audit. List A represents the types of opinions the auditor ordinarily would issue, and List B represents the report modifications (if any) that would be necessary. For each situation, select one response from List A and one from List B. Select, as the best answer for each item, the action the auditor normally would take. Items from either list may be selected once, more than once, or not at all. Assume the following: • The auditor is independent • The auditor previously expressed an unmodified opinion on the prior-year financial statements unless otherwise noted • Only single-year (not comparative) statements are presented for the current year (unless otherwise stated) • The conditions for an unmodified opinion exist unless contradicted in the factual scenario • The conditions stated in the factual scenario are material • No report modifications are to be made except in response to the factual scenario Factual Scenario 1. The financial statements present fairly, in all material respects, the financial position, results of operations, and cash flows in conformity with GAAP. 2. In auditing the Long-Term Investments account, an auditor is unable to obtain audited financial statements for an investee located in a foreign country. The auditor concludes that sufficient competent evidential matter regarding this investment cannot be obtained but it is not pervasive to the financials as a whole. 3. Due to recurring operating losses and working capital deficiencies the auditor has substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. However, the financial statement disclosures are adequate. 4. The principal auditor decides to refer to the work of another auditor, who audited a wholly owned subsidiary of the entity and issued an unqualified opinion. 5. An entity issues financial statements that present financial position and results of operations but omits the related statement of cash flows. Management discloses in the notes to the financial statements that it does not believe the statement of cash flows to be useful. 6. An entity changes its depreciation method for production equipment from straight-line to units of production based on hours of utilization. The auditor concurs with the change, although it has a material effect on the comparability of the entity's financial statements. 7. An entity is a defendant in a lawsuit alleging infringement of certain patent rights. However, management cannot reasonably estimate the ultimate outcome of the litigation. The auditor believes that there is a reasonable possibility of a significant material loss, but the lawsuit is adequately disclosed in the notes to the financial statements. 8. An entity discloses certain lease obligations in the notes to the financial statements. The auditor believes that the failure to capitalize these leases is a departure from GAAP. 9. The entity wishes to show comparative financial statements and include the prior year. However, the prior year financial statements contained a qualification due to an inappropriate method of GAAP. Accordingly, management corrected the prior year GAAP deficiency and included the updated numbers in the comparative financials for the current year. 10. The entity wishes to show comparative financial statements and include the prior year. However, the prior year financial statements were audited by another auditor who refuses to reissue his opinion.

A qualified opinion audit report is issued when all auditing conditions have been met, no significant misstatements have been discovered, and it is the auditor's opinion that the financial statements are fairly stated in accordance with GAAP.

When a qualified opinion is issued, an explanatory paragraph is added immediately after the opinion paragraph to explain the nature of the qualification that affects the opinion.

Most auditors believe that financial statements are "presented fairly" when the statements are in accordance with GAAP, and that it is also necessary to

The critical audit matters section of the audit report is required for audits of fiscal years ending on or after June 30, 2019 for large companies, and fiscal years ending on or after December 31, 2020 for all other audits to which these requirements apply.

An auditor can express a qualified opinion due to a

For departures from GAAP or scope restrictions, the auditor must decide if the potential effect on the financial statements is

An audit of historical financial statements most commonly includes the

A restriction on the scope of the auditor's examination requires

To emphasize the fact that the auditor is independent, a typical addressee of the audit report could be