Exam 18: Reports on Audited Financial Statements

Which of the following auditing procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern?

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Question 1

Correct Answer:

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Jeff Johns is a staff accountant and has been assigned to the audit of Worldwide Enterprises,Inc.Subsequent to the completion of fieldwork,Jeff was assigned to draft the audit report.The content of one of the paragraphs he has drafted reads as follows: As explained in Note 2 to the financial statements,Worldwide Enterprises has charged goodwill and certain other intangible assets acquired in two separate acquisitions directly to shareholders' equity.Under generally accepted accounting principles,these intangibles should have been recorded as assets and amortized to income over future periods.Had these intangibles been capitalized,total assets would have increased by $400,000 as of December 31,2011 and net income and earnings per share would be increased by $380,000 and $2.25,respectively (assuming a 20-year amortization period). a.Based on the contents of the paragraph above,which condition requiring a departure from a standard unqualified/unmodified opinion exists in the engagement? b.Assuming that the engagement partner agrees with the paragraph Jeff has prepared above,where in the auditor's report should the paragraph be placed? c.How would the materiality of the condition above affect the final choice of opinion?

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Question 2

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a.The paragraph indicates a departure from GAAP,which would require a departure from a standard unqualified/unmodified opinion--either qualified or adverse,depending on the materiality of the issue.
b.If a qualified or an adverse report is issued,the paragraph should be placed before the opinion paragraph.
c.A material misstatement would require a qualified opinion.A pervasively material misstatement would require an adverse opinion.

Discuss the conditions that prohibit the auditor from issuing an unqualified/unmodified opinion and the types of reports that the auditor may issue for a financial statement audit.

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Question 3

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There are three circumstances that may require a departure from an unqualified/unmodified audit report:
1.Scope limitation.A scope limitation results from an inability to collect sufficient appropriate evidence,such as when management prevents the auditor from conducting an audit procedure considered necessary.
2.Departure from GAAP.The financial statements are affected by a departure from GAAP.
3.Lack of auditor independence.The auditor must comply with the second general standard and the Code of Professional Conduct in order to issue an unqualified/unmodified opinion.
The three types of reports other than the standard unqualified/unmodified are:
1.Qualified.The auditor's opinion is qualified because of either a scope limitation or a departure from a GAAP,but overall the financial statements present fairly.
2.Disclaimer.The auditor disclaims an opinion on the financial statements either because there is insufficient appropriate evidence to form an opinion on the overall financial statements or because there is a lack of independence.
3.Adverse.The auditor's opinion states that the financial statements do not present fairly in conformity with GAAP because the departure materially affects the overall financial statements.

All of the following are true with respect to the auditor's consideration of information other than the audited financial statements that are included in a client's annual report except:

(Multiple Choice)

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Question 4

An auditor concludes that there is a material inconsistency in the other information in an annual report to shareholders containing audited financial statements.If the auditor concludes that the financial statements do not require revision,but the client refuses to revise or eliminate the material inconsistency,the auditor may

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Question 5

Abbot,CPA,as principal auditor for consolidated financial statements,is using a qualified report of another auditor.Abbot does not consider the qualification material relative to the consolidated financial statements and Abbot is willing to accept responsibility for the work of the other auditor.What recognition,if any,must Abbot make in his report to the report of the other audit?

(Multiple Choice)

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Question 6

Identify the special purpose framework used in each of the following situations. 1.A real estate company reports to its partners on the basis used to complete the income tax return. 2.A company has its financial statements prepared on a price-level adjusted basis as required by its lender. 3.An insurance company reports in compliance with the rules of a state insurance commission. 4.A partnership reports on revenues received and expenses paid. What modifications must be made to the standard auditor's report for these situations?

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Question 7

An auditor may be unable to express an unqualified opinion if an immaterial departure from GAAP is present in the financial statements.

(True/False)

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Question 8

Which of the following parties is responsible for the fairness of the representations made in financial statements?

(Multiple Choice)

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Question 9

For each of the following situations,indicate what type of audit report is most appropriate. a.The auditor lacks independence in fact,but not necessarily in appearance. b.There is a scope limitation and it is material but the overall financial statements are still presented fairly. c.The uncorrected misstatements are immaterial. d.There is a departure from GAAP and it is pervasively material.

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Question 10

For which of the following events would an auditor issue a report that does not include any reference to consistency?

(Multiple Choice)

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Question 11

Cravens was asked to perform the first audit of a wholesale business that does not maintain perpetual inventory records.Cravens has observed the current inventory but has not observed the physical inventory at the previous year-end date and concludes that the opening inventory balance,which is not auditable,is a material factor in the determination of cost of goods sold for the current year.Cravens will probably

(Multiple Choice)

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Question 12

When audited financial statements are presented in a client's document containing other information,the auditor should

(Multiple Choice)

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Question 13

A change in accounting estimate is an example of an accounting change that affects comparability and requires an explanatory/emphasis-of-matter paragraph in the audit report.

(True/False)

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Question 14

An accountant has been engaged to report on an entity's internal controls without performing an audit of the financial statements.What restrictions,if any,should the accountant place on the use of this report?

(Multiple Choice)

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Question 15

If the principal auditor decides to make reference to the other auditor's examination,the introductory paragraph must specifically indicate the

(Multiple Choice)

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Question 16

Changes in a client's accounting choices either affect "consistency" in the application of GAAP or they do not.For each item listed below,state whether the item affects consistency and identify the effect the change will have on the audit report. 1.Change in accounting estimate. 2.Correction of an error in principle. 3.Change in reporting entity. 4.Correction of an error that does not involve an accounting principle. 5.Change in accounting principle. 6.Change in classification and reclassification. 7.Change expected to have a material future effect.

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Question 17

An auditor would issue an adverse opinion if

(Multiple Choice)

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Question 18

A scope limitation results from an inability to obtain sufficient appropriate evidence about some component of the financial statements.

(True/False)

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Question 19

A change in reporting entity is an example of an accounting change that affects comparability and requires an explanatory/emphasis-of-matter paragraph in the audit report.

(True/False)

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Question 20

Showing 1 - 20 of 75

Which of the following auditing procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern?

Discuss the conditions that prohibit the auditor from issuing an unqualified/unmodified opinion and the types of reports that the auditor may issue for a financial statement audit.

All of the following are true with respect to the auditor's consideration of information other than the audited financial statements that are included in a client's annual report except:

An auditor may be unable to express an unqualified opinion if an immaterial departure from GAAP is present in the financial statements.

Which of the following parties is responsible for the fairness of the representations made in financial statements?

For which of the following events would an auditor issue a report that does not include any reference to consistency?

When audited financial statements are presented in a client's document containing other information,the auditor should

A change in accounting estimate is an example of an accounting change that affects comparability and requires an explanatory/emphasis-of-matter paragraph in the audit report.

An accountant has been engaged to report on an entity's internal controls without performing an audit of the financial statements.What restrictions,if any,should the accountant place on the use of this report?

If the principal auditor decides to make reference to the other auditor's examination,the introductory paragraph must specifically indicate the

An auditor would issue an adverse opinion if

A scope limitation results from an inability to obtain sufficient appropriate evidence about some component of the financial statements.

A change in reporting entity is an example of an accounting change that affects comparability and requires an explanatory/emphasis-of-matter paragraph in the audit report.

An Introduction to Assurance and Financial Statement Auditing

The Financial Statement Auditing Environment

Audit Planning,Types of Audit Tests,and Materiality

Risk Assessment

Evidence and Documentation

Internal Control in a Financial Statement Audit

Auditing Internal Control Over Financial Reporting

Audit Sampling: An Overview and Application to Tests of Controls

Audit Sampling: An Application to Substantive Tests of Account Balances

Auditing the Revenue Process

Auditing the Purchasing Process

Auditing the Human Resource Management Process

Assurance,Attestation,and Internal Auditing Services

Auditing the Financinginvesting Process: Prepaid Expenses, Intangible Assets, and Property, Plant, and Equipment

Auditing the Financinginvesting Process: Long-Term Liabilities, Stockholders Equity, and Income Statement Accounts

Auditing the Financinginvesting Process: Cash and Investments

Completing the Audit Engagement

Professional Conduct,Independence,and Quality Control

Legal Liability

Assurance,Attestation,and Internal Auditing Services

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