Exam 12: Reports on Audited Financial Statements

The auditors include a separate 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

Auditors will issue an adverse opinion when

The auditors' report references the consistent application of accounting principles only when the entity has changed accounting principles.

When auditors wish to issue an unqualified opinion but highlight that the entity changed its method of accounting for software development costs,what type of report modification would be most appropriate?

When auditors qualify their opinion on the entity's financial statements because of inadequate disclosure,the auditors should describe the nature of the omission in an additional paragraph and modify the

Murray & Co.,CPAs,completed the audit of Classic,Inc.,a public entity,on March 1,2013 for a January 31,2013 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 report on Classic's financial statements was appropriate.The auditors' report,drafted by I.M.Nu,a staff assistant,follows. We have audited the accompanying consolidated balance sheets of Classic,Inc.and subsidiaries as of January 31,2013,and 2012,the related consolidated statements of shareholders' equity,and cash flows for each of the years in the three-year period ended January 31,2013.These financial statements are the responsibility of Classic,Inc.'s management. We conducted our audits in accordance with the Statements on Auditing Standards issued by the Auditing Standards Board of the American Institute of Certified Public Accountants.Those standards require that we plan and perform the audit to obtain absolute 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 internal controls,accounting principles used,and significant estimates made by management as well as evaluating the overall financial statement presentation.We believe that our audits provide an unconditional basis for our opinion. In our opinion,the financial statements referred to above correctly show the financial position of Classic,Inc.and consolidated subsidiaries at January 31,2013 and 2012,and the results of their operations for the years then ended. 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.

When indicating a division of responsibility in the audit of ___________________________________,the group auditors may choose to refer to the work of component auditors in their report.

In which of the following circumstances would auditors most likely add an explanatory paragraph to the standard report without affecting the unqualified opinion on the entity's financial statements?

Which of the following is not included in the scope paragraph of the standard report on the entity's financial statements?

Auditors found that the entity has not capitalized a material amount of leases in the financial statements.When considering the overall materiality of this departure from GAAP,the auditors would choose which reporting options?

If predecessor auditors had examined comparative financial statements,those auditors' reports must be presented along with the auditors' report.

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

The _____________________________ paragraph of the auditors' report on the entity's financial statements indicates that an audit has been conducted and identifies the financial statements the auditors examined.

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

When disclaiming an opinion due to a client-imposed scope limitation,auditors should indicate in a separate paragraph why the audit did not comply with the standards of the PCAOB.The auditors should also omit

The auditors conclude that an entity's illegal act,which has a material effect on the financial statements,has not been properly accounted for or disclosed.Depending on the overall materiality and pervasiveness of the effect of this illegal act on the financial statements,the auditors should express either a(n)

If the audit scope is restricted in some specific respect,but sufficient appropriate evidence is gathered by performing other procedures,the standard scope paragraph of the report need not be modified.

Which of these situations would require auditors to append an explanatory paragraph about consistency to an otherwise unqualified opinion?

For each of the following sentences or phrases,indicate by letter in which paragraph of the standard report on the entity's financial statements the sentence or phrase would appear. A. Introductory B. Scope C. Opinion

When a scope limitation exists and the auditors have not been able to obtain sufficient appropriate evidence on a particular account balance or disclosure,the auditors must choose between a(n)_____________________________ opinion and a(n)_____________________________ of opinion on the entity's financial statements.