Question 1

Which of the following is true with respect to the auditors' report on summary financial statements?

Accepted Answer

A) Auditors can only issue a report on summary financial statements if they have expressed an unmodified opinion on the full financial statements. 
B) The report will indicate whether the summary financial statements are fairly stated in relation to the full financial statements. 
C) The report will express limited assurance on whether the summary financial statements are prepared in accordance with AICPA presentation guidelines. 
D) The report will express an opinion on whether the summary financial statements present the financial condition, results of operations, and cash flows in accordance with generally accepted accounting principles.

Question 2

The group auditors decide not to refer to the audit of component auditors who audited a subsidiary of the group financial statements. After making inquiries about the component auditors' professional reputation and independence, the group auditor most likely would

Accepted Answer

A) document in the engagement letter that the group auditors assume no responsibility for the component auditors' work. 
B) obtain written permission from the component auditors to omit the reference in the group auditors' report. 
C) contact the component auditors' and review the audit programs and working papers pertaining to the subsidiary. 
D) add an other-matter paragraph to the group auditors' report indicating that the subsidiary's financial statements are not material to the consolidated financial statements.

Question 3

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?

Accepted Answer

A) A change in the estimate of useful lives used to depreciate property, plant, and equipment. 
B) A change in the entity's form of reporting entity. 
C) Management has changed from one generally accepted accounting principle to another but has not provided reasonable justification. 
D) A change from an accounting principle that conforms with GAAP to one that does not.

Question 4

After considering management's plans, an auditor concludes that there is substantial doubt about a client's ability to continue as a going concern for a reasonable period of time. The auditor's responsibility includes

Accepted Answer

A) disclaiming an opinion on the financial statements due to the indications of possible financial difficulties. 
B) indicating to the client's audit committee whether management's plans for dealing with the adverse effects of the financial difficulties can be effectively implemented. 
C) considering the adequacy of disclosure about the client's possible inability to continue as a going concern. 
D) issuing a qualified or adverse opinion, depending upon materiality, due to the possible effects on the financial statements.

Question 5

In which of the following circumstances may auditors issue the standard (unmodified) report on the entity's financial statements?

Accepted Answer

A) The entity changed accounting principles having an immaterial effect on the entity's financial position, results of operations, and cash flows. 
B) The auditors wish to emphasize a matter regarding the financial statements. 
C) The auditors reference component auditors who examined a subsidiary of group financial statements. 
D) The auditors have not been able to audit a substantial portion of the balance sheet because of a circumstance-imposed scope limitation.

Question 6

During the year under audit, Forrest Corporation experienced significant losses due to a pervasive fraud scheme. Because of the lack of documentary evidence and inability to perform appropriate auditing procedures, the auditors were unable to determine the total amount of the loss. What type of report should the auditors issue?

Accepted Answer

A) Qualified or adverse opinion. 
B) Disclaimer or adverse opinion. 
C) Disclaimer of opinion or qualified opinion. 
D) Unqualified opinion with an explanatory paragraph.

Question 7

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 8

Independent auditors must consider whether the entity has the ability to continue as a going concern. If a substantial doubt exists but disclosure is adequate and no other basis exists for modifying the report, the auditors would normally

Accepted Answer

A) disclaim an opinion. 
B) express an adverse opinion. 
C) qualify the opinion. 
D) express an unqualified opinion with an explanatory paragraph describing the going-concern uncertainty.

Question 9

Which of the following is not an appropriate reporting option when component auditors are involved in the audit of group financial statements, assuming that the component auditors' work did not identify any issues affecting the group auditors' report?

Accepted Answer

A) Issue a standard report that does not reference any involvement by the component auditors. 
B) Identify the component auditors by name and present their report along with the group auditors' report. 
C) Refer to the component auditors' work and disclose the extent of their work in the group auditors' report. 
D) Disclaim an opinion on the portion of the financial statements examined by the component auditors.

Question 10

What is the auditors' responsibility for reporting on other information accompanying financial statements?

Accepted Answer

A) Because this information is not a fundamental part of the financial statements, the auditors have no reporting responsibility with respect to this information. 
B) Auditors are only required to report on other information if it is inconsistent with information in the audited financial statements. 
C) Auditors are required to provide reasonable assurance with respect to whether the other information is presented in accordance with generally accepted accounting principles. 
D) Auditors are required to express an opinion on whether the other information is presented in accordance with generally accepted accounting principles.

Question 11

Carson, LLP, audited Best Corporation's financial statements for the year ended December 31, Year 1. On February 15, Year 3, Carson gave Best permission to reissue the report previously issued on and dated March 1, Year 2. When is the cutoff date for Carson's responsibility on the reissued report?

Accepted Answer

A) December 31, Year 1. 
B) March 1, Year 2. 
C) December 31, Year 2. 
D) February 15, Year 3.

Question 12

The standard (unmodified) report issued in the audit of a non-issuer includes a(n)

Accepted Answer

A) Responsibilities of Management for the Financial Statements Section providing a general description of an audit conducted in accordance with the applicable auditing standards. 
B) Opinion Section identifying the responsibility of management and auditors in the financial reporting process. 
C) Internal Control Section indicating the effectiveness of the entity's internal control over financial reporting. 
D) Opinion Section providing the auditors' conclusion as to the fair presentation of the financial statements.

Question 13

Harris & Thompson were engaged to audit Smart Corp's comparative financial statements for the years ended December 31, Year 1 and Year 2. The Year 1 financial statements were presented in accordance with generally accepted accounting principles, but the Year 2 financial statements were determined to be materially misstated. As a result, Harris & Thompson should

Accepted Answer

A) issue a qualified opinion on the comparative financial statements as a whole. 
B) issue an unmodified opinion on the Year 1 financial statements and disclaim an opinion on the Year 2 financial statements. 
C) issue an unmodified opinion on the Year 1 financial statements and a qualified opinion on the Year 2 financial statements. 
D) reissue the previous opinion on the Year 1 financial statements and withdraw from the engagement.

Question 14

In which of the following circumstances would auditors most likely add an emphasis-of-matter paragraph or additional section to the standard (unmodified) report without modifying the opinion on the entity's financial statements?

Accepted Answer

A) The auditors are asked to report on the balance sheet, but not on the other basic financial statements. 
B) There is substantial doubt about the entity's ability to continue as a going concern. 
C) Management's estimates of the effects of future events on the entity's financial condition, results of operations, and cash flows are unreasonable. 
D) Certain transactions cannot be tested because of management's records retention policy.

Question 15

Which of the following best describes the auditors' responsibility when financial statements are presented in comparative format?

Accepted Answer

A) The auditors' report must only refer to the current year's financial statements. 
B) The auditors' report must only refer to the prior years' financial statements if they were audited by the current auditor. 
C) The auditors' report must only refer to the prior years' financial statements if they were audited by either the current auditors or predecessor auditors. 
D) The auditors' report must refer to all financial statements presented in comparative form, regardless of whether they have been audited by the current auditors or predecessor auditors.

Question 16

When updating the report on prior years' financial statements presented in comparative form, the auditors' responsibility for the prior years' financial statements is

Accepted Answer

A) limited to the previously issued report date. 
B) extended to the date of the updated audit report. 
C) limited to 30 days after the date of the prior years' financial statements. 
D) extended to the updated report date only if information comes to the auditors' attention requiring modification of the previously expressed opinion.

Question 17

An entity's comparative financial statements include the financial statements of the prior year that were audited by a predecessor auditor whose report is not presented. If the predecessor's report was qualified, the successor should

Accepted Answer

A) issue an updated comparative report indicating the involvement of component auditors. 
B) explain to the client that comparative financial statements may not be presented under these circumstances. 
C) express an opinion only on the current year's financial statements and make no reference to the prior years' statements. 
D) indicate the substantive reasons for the qualification in the predecessor auditors' opinion.

Question 18

When a predecessor auditor has examined the prior years' financial statements presented in comparative format, the current auditors' report should

Accepted Answer

A) make no reference to the predecessor auditors' report. 
B) reference the predecessor auditors' report in the Opinion Section, Basis for Opinion Section, and Auditor's Responsibilities for the Audit of the Financial Statements Section. 
C) reference the predecessor auditors' report in an other-matter paragraph. 
D) disclaim an opinion on the prior years' financial statements.

Question 19

The auditors include an explanatory paragraph in an otherwise unqualified 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

Accepted Answer

A) is considered a qualification of the opinion. 
B) violates generally accepted auditing standards if this information is already disclosed in footnotes to the financial statements. 
C) necessitates a revision of the Opinion Section to include the phrase "with the foregoing explanation." 
D) is appropriate and would not otherwise affect the unqualified opinion.

Question 20

What is the major difference between a reissued report and an updated report?

Accepted Answer

A) An updated report considers information that has come to the auditors' attention since the date of the original report, while a reissued report does not consider this information. 
B) An updated report can be presented along with the entity's financial statements, but a reissued report cannot be presented along with the entity's financial statements. 
C) An updated report will express a different opinion on the prior years' financial statements that were originally expressed by the auditors, while a reissued report will express the same opinion. 
D) An updated report will not express an opinion other than an unqualified opinion, while a reissued report can express an unqualified opinion, qualified opinion, adverse opinion, or disclaimer of opinion.

Exam 12: Reports on Audited Financial Statements