Question 1

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

Accepted Answer

A)  refer to the change in an explanatory paragraph.
B)  explicitly concur that the change is preferred.
C)  not refer to consistency in the report.
D)  refer to the change in the Basis for Opinion Section. C

Question 2

Auditors will issue an adverse opinion when

Accepted Answer

A)  a severe scope limitation has been imposed by the entity.
B)  a violation of generally accepted accounting principles is sufficiently material and pervasive that a qualified opinion is not justified.
C)  a qualified opinion cannot be rendered because the auditors lack independence.
D)  the entity's ability to continue as a going concern is subject to substantial doubt. B

Question 3

In which of the following situations would auditors ordinarily choose between expressing a qualified opinion or an adverse opinion on the entity's financial statements?

Accepted Answer

A)  The auditors did not observe the entity's physical inventory and are unable to become satisfied as to its balance by other auditing procedures.
B)  The financial statements fail to disclose information that is required by generally accepted accounting principles.
C)  The auditors are asked to report only on the entity's balance sheet and not on the other basic financial statements.
D)  Events disclosed in the financial statements cause the auditors to have substantial doubt about the entity's ability to continue as a going concern. B

Question 4

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

Accepted Answer

A)  Modify the Opinion Section and Basis for Opinion Section of the report for lack of conformity with generally accepted accounting principles.
B)  disclaim an opinion on the entity's financial statements because of uncertainty.
C)  disclose the matter in an emphasis-of-matter paragraph but not modify the Opinion Section of the report.
D)  Not modify the report because both principles are generally accepted accounting principles.

Question 5

When reporting on comparative financial statements, auditors ordinarily should modify their previously expressed opinion on the prior years' financial statements if the

Accepted Answer

A)  prior years' financial statements are restated to conform with generally accepted accounting principles.
B)  auditors were predecessor auditors who have been requested by a former client to reissue the previous report.
C)  prior years' opinions were unmodified and the opinion on the current year's financial statements is modified due to a lack of consistency.
D)  prior years' financial statements are restated following an acquisition in the current year.

Question 6

When auditors lack independence, which of the following is true about the report on the entity's financial statements that should be issued?

Accepted Answer

A)  The auditors should disclaim an opinion and should state specifically that they are not independent.
B)  The auditors should disclaim an opinion but not mention that they are not independent.
C)  The auditors should issue an unqualified opinion with an explanatory paragraph stating that they are not independent.
D)  The auditors should issue a qualified opinion with an explanatory paragraph stating that they are not independent.

Question 7

Which of the following best reflects the auditors' reporting responsibility under generally accepted auditing standards? $\begin{array}{llc}& \text {Other Information Accompanying}& \text { Required Supplementary}
& \text {the Financial statements}& \text { Information}\end{array}$ A.$\begin{array}{llc}&&&&& \text { Exception } &&&&&&&&& \text { Required } \\end{array}$
B. $\begin{array}{llc}&&&&& \text { Exception } &&&&&&&&& \text { Exception } \\end{array}$
C. $\begin{array}{llc}&&&&& \text { Required } &&&&&&&&& \text { Required } \\end{array}$
D. $\begin{array}{llc}&&&&& \text { Required } & &&&&&&&&\text { Exception }
\end{array}$

Accepted Answer

A)  Option A
B)  Option B
C)  Option C
D)  Option D

Question 8

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 misstatements have a material and pervasive effect on the financial statements?

Accepted Answer

A)  Qualified opinion.
B)  Unmodified opinion.
C)  Disclaimer of opinion.
D)  Adverse opinion.

Question 9

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?

Accepted Answer

The answer of Define a scope limitation and distinguish between...

Question 10

Which of the following statements is not included in the Auditor's Responsibilities for the Audit of the Financial Statements Section of the standard (unmodified) report?

Accepted Answer

A)  "In accordance with accounting principles generally accepted in the United States of America."
B)  "Our objectives are to obtain reasonable assurance…and to issue an auditor's report that includes our opinion"
C)  "…it is not a guarantee that an audit conducted in accordance with GAAS will always detect a material misstatement…"
D)  "Reasonable assurance is a high level of assurance but is not absolute assurance…"

Question 11

The auditors have determined that there is substantial doubt about an entity's ability to continue as a going concern. When considering the appropriateness of management's disclosures and severity of the uncertainty, all of the following reports could be issued, except

Accepted Answer

A)  qualified opinion based on a material and pervasive uncertainty.
B)  unqualified opinion with an additional verbiage describing the uncertainty.
C)  adverse opinion based on inadequate disclosure of the uncertainty.
D)  disclaimer of opinion based on a material and pervasive uncertainty.

Question 12

"As described in Note 5 to the financial statements, General Express changed its statistical method of computing product warranty expense for the year ended December 31, 20x1…" is an illustration of a

Accepted Answer

A)  consistency change requiring a qualified opinion.
B)  scope limitation.
C)  departure from generally accepted accounting principles.
D)  report with a consistency modification.

Question 13

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

Accepted Answer

A)  qualification.
B)  division of responsibility.
C)  expansion of scope.
D)  scope limitations.

Question 14

Under which of the following circumstances would a disclaimer of opinion on the entity's financial statements not be appropriate?

Accepted Answer

A)  The financial statements fail to contain adequate disclosure of related-party transactions.
B)  The entity refuses to permit its attorney to furnish information requested in an attorney letter.
C)  The auditors are engaged after the date of the financial statements and are unable to observe physical inventories or apply alternative procedures to verify their balances.
D)  The auditors are unable to determine the amounts associated with illegal acts committed by the entity's management.

Question 15

When auditors are engaged to examine an entity's financial statements but decide to issue a disclaimer of opinion because of a scope limitation, the report would not

Accepted Answer

A)  identify management's responsibility for the financial statements.
B)  refer to any scope limitation in the Basis for Opinion Section.
C)  modify the Auditor's Responsibilities for the Audit of the Financial Statements Section to identify the basis for the disclaimer.
D)  indicate that the auditors were engaged to audit the financial statements.

Question 16

Auditors most likely would issue a disclaimer of opinion on the entity's financial statements because of

Accepted Answer

A)  inadequate disclosure of material information.
B)  the omission of the Statement of Cash Flows.
C)  a material departure from generally accepted accounting principles.
D)  management's refusal to furnish written representations.

Question 17

Harris is auditing the financial statements of Cole Corp., an energy company. The FASB requires that these financial statements must be accompanied by supplementary mineral reserve information. If this required information is materially misstated, what type of report should Harris issue?

Accepted Answer

A)  Unqualified opinion on the financial statements with an explanatory paragraph disclaiming an opinion on the mineral reserve information, but noting the misstatement.
B)  Adverse opinion on the financial statements and mineral reserve information due to the misstatement.
C)  Unqualified opinion on the financial statements with an explanatory paragraph expressing a qualified or adverse opinion on the mineral reserve information.
D)  Qualified opinion on the financial statements and mineral reserve information due to the misstatement.

Question 18

When audited financial statements are presented in a document containing other information, the auditors should

Accepted Answer

A)  perform inquiry and analytical procedures to ascertain whether the other information is reasonable.
B)  add an explanatory paragraph describing the other information to the auditors' report without modifying the opinion on the financial statements.
C)  perform the appropriate substantive procedures to corroborate the other information.
D)  read the other information to determine that it is consistent with the audited financial statements.

Question 19

Which of the following scope limitations would ordinarily be of most concern to the auditors?

Accepted Answer

A)  The inability to observe inventories because auditors were appointed following the date of the financial statements.
B)  Management's refusal to provide auditors with written representations.
C)  The inability to obtain confirmation of year-end balances from customers because of different billing dates.
D)  The use of the work of component auditors in the audit of group financial statements.

Question 20

When financial statements contain a departure from GAAP, the auditors should explain the unusual circumstances in a separate paragraph and express an opinion that is

Accepted Answer

A)  unqualified.
B)  qualified.
C)  adverse.
D)  qualified or adverse, depending on the overall materiality and pervasiveness of the GAAP departure.

Exam 12: Reports on Audited Financial Statements