Exam 3: Audit Reports

When there is a scope restriction,what type of audit report can be issued?

Changes in reporting 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 paragraph in the audit report.

The appropriate audit report date for a standard nonqualified audit report for a non-public entity should be the:

The standard unqualified audit report for a non-public entity must:

When a client fails to follow GAAP,the audit report can be unqualified,qualified,or adverse depending on the materiality.What factors affect materiality that an auditor should consider?

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:

Financial statement users are typically more concerned with an unqualified report with explanatory paragraphs than they are with a disclaimer of opinion.

Which of the following requires recognition in the auditor's opinion as to consistency?

AICPA auditing standards provide uniform wording for the auditor's report to enable users of the financial statements to understand the audit report.

Discuss how materiality affects audit reporting decisions.

An audit report prepared by Garrett and Brown,CPAs,is provided below.The audit for the year ended December 31,2012 was completed on March 1,2013,and the report was issued to Javlin Corporation,a private company,on March 13,2013.List any deficiencies in this report.Do not rewrite the report. We have examined the accompanying financial statements of Dalton Corporation as of December 31,2012.These financial statements are the responsibility of the company's management. Management's Responsibility for the Financial Statements: Management is responsible for the preparation and fair presentation of the financial statements in accordance with generally accepted auditing standards; this includes the design,implementation,and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from all misstatement,whether due to fraud or error. Auditor's Responsibility Our responsibility is to give an opinion on these financial statements based on our audit.We conducted our audits in accordance with auditing standards generally accepted throughout the world.Those standards require that we plan and perform the audit to obtain absolute assurance about whether the financial statements are free of misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements.The procedures selected depend on management's judgment,including the assessment of the risks of material misstatement of the income statement,whether due to fraud or error.In making those risk assessments,the auditor considers internal control relevant to the auditor'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.An audit also includes evaluating the appropriateness of accounting policies and the accuracy of accounting estimates made by management,as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion,the financial statements referred to above present accurately the financial position of Javlin Corporation as of December 31,2012,in conformity with accounting principles generally accepted in the United States of America. Garrett and Brown,CPAs March,2013

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

Which of the following is a correct statement regarding materiality?

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 unqualified 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 unqualified 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 F/S 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 F/S 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 F/S that present financial position and results of operations but omits the related statement of cash flows.Management discloses in the notes to the F/S that it does not believe the statement of cash flows to be useful. 6.An entity changes its depreciation method for production equipment from SL 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 F/S. 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 F/S. 8.An entity discloses certain lease obligations in the notes to the F/S.The auditor believes that the failure to capitalize these leases is a departure from GAAP. 9.The entity wishes to show comparative F/S and include the prior year.However,the prior year F/S 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 F/S and include the prior year.However,the prior year F/S were audited by another auditor who refuses to reissue his opinion.

When an adverse opinion is issued,a scope paragraph would be:

A misstatement in the financial statements can be considered material if knowledge of the misstatement will affect a decision of:

The explanatory paragraph for a qualified opinion would:

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:

Which of the following are changes that affect the comparability of financial statements but not the consistency and therefore,do not have to be included in the auditor's report?

In the case of a disclaimer due to lack of independence,the entire scope paragraph is excluded from the report.