Exam 12: Reports on Audited Financial Statements

SEC registrants' financial statements should be accompanied by all of the following reports except

Which of the following is an example of a material accounting change that requires recognition in an unmodified opinion on the entity's financial statements?

Murray & Co.,CPAs completed the audit of Classic Inc.,a nonpublic entity,on March 1,2015 for a January 31,2015 fiscal year end.The audit team encountered no significant issues and found no material misstatements.Murray & Co.has audited Classic Inc.for several years and past audits did not reveal any significant issues or material misstatements.The audit team partner determined that a standard (unmodified)report on Classic Inc.'s financial statements was appropriate.The auditors' report,drafted by I.M.Nu,a staff assistant,is provided below. Independent Auditor's Report To the Board of Directors and Shareholders Classic,Inc. We have audited the accompanying financial statements of Classic Inc.,which comprise the balance sheet as of January 31,2015 and the related statements of changes in shareholders' equity and cash flows for the year then ended,and the related notes to the financial statements. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America. Auditor's Responsibility Our responsibility is to express an opinion on these financial statements based on our audit.We conducted our audit in accordance with generally accepted auditing standards.Those standards require that we plan and perform the audit to obtain absolute assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements,including the assessment of the risks of material misstatement of the financial statements,whether due to fraud or error.In making those risk assessments,the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances,but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control.Accordingly,we express no such opinion.An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management,as well as evaluating the overall presentation of the financial statements. Opinion In our opinion,the financial statements referred to above present fairly,the financial position of Classic,Inc.as of January 31,2015 and the results of its operations and its cash flows for the year then ended. Murray & Co,CPAs January 31,2015 Required: Identify the deficiencies and errors in the draft report.Do not rewrite the report,but be specific as to what is incorrect or omitted.Organize your answer by paragraph or section.

When auditors conclude that a material and pervasive departure from GAAP exists in an entity's financial statements,which of the following phrases would most likely be included in their report?

Restrictions imposed by an entity prohibited the observation of physical inventories,which accounted for 35% of total assets.Alternative auditing procedures were not feasible,although the auditors were able to examine satisfactory evidence for all other items in the financial statements.The auditors would most likely express

The auditors include an emphasis-of-matter paragraph in an otherwise unmodified report on the entity's financial statements to emphasize that the entity being reported on had significant transactions with related parties.The inclusion of this separate paragraph

The auditors conclude that there is a material inconsistency in the "other information" in an annual report to shareholders containing audited financial statements.If the auditors conclude that the financial statements do not require revision,but the entity refuses to revise or eliminate the material inconsistency,the auditors may

A report that acknowledges reliance on the reports of component auditors is a type of report modification known as a(n)

If management fails to provide adequate justification for a change from one generally accepted accounting principle to another,the auditors should

Define a scope limitation and distinguish between client-imposed and circumstance-imposed scope limitations.What reporting options are available to auditors when scope limitations are encountered during the engagement?

Holmes,CPA,assisted Williams Corporation in preparing its financial statements and gave Williams permission to use Holmes's name in communications containing these financial statements.If Holmes did not audit the financial statements,what type of opinion should be expressed?

The auditors' report on the entity's financial statements included an additional paragraph disclosing a difference of opinion between the auditors and the entity for which the auditors believed an adjustment to the financial statements should be made.The opinion paragraph of the auditors' report should express a(n)

In each of the circumstances listed below,indicate,by appropriate letter,which of the following types of opinions should be rendered on the entity's financial statements? A. Unmodified B. Qualified C. Adverse D. Disclaimer ___ 1. Departure from generally accepted accounting principles that is material but not pervasive. ___ 2. Going-concern uncertainties that may have a material (but not pervasive) effect on the financial statements. ___ 3. Emphasis of a matter, no GAAP departure. ___ 4. Material, but not pervasive, scope limitation. ___ 5. Material and pervasive departure from GAAP.

When there has been a change in accounting principles,but the effect of the change on the comparability of the financial statements is not material,the auditors should

Management determined it was probable that a pending litigation claim would result in a material loss.The loss was disclosed in the footnotes to the financial statements but was not accrued in the income statement.If the auditors believe an accrual should be made,what type of report should be issued?

When a previously expressed opinion is updated from qualified to unmodified,the auditors' report on comparative financial statements should

In which of the following should an auditors' report refer to the lack of consistency when there is a change in accounting principle that is significant?

Which of the following phrases would auditors most likely include in their report when expressing a qualified opinion on the entity's financial statements because of inadequate disclosure?

In which of the following circumstances would auditors be most likely to express an adverse opinion?

A client has capitalizable leases but refuses to capitalize them in the financial statements.Which of the following reporting options does an auditor have if the amounts pervasively distort the financial statements?