Question 1

Smith and Jones,CPAs,audited the consolidated financial statements of Concord Inc.and all but one of its subsidiaries for the year ended September 30,2016 and are expressing an unqualified opinion on the financials presented as a whole.
Smith,the engagement partner,instructed Mary,an assistant on the engagement,to draft the auditor's report on November 4,2016,the date of fieldwork completion.In drafting the report Mary considered the following:
• In preparing its financial statements,Concord changed its method of accounting for research and development costs and properly expensed these amounts.Management described the change in principle in Note 10 to the consolidated financial statements.
• Ball & Brown,CPAs,audited the financial statements of Biotherm,Inc.,a consolidated subsidiary of Concord for the year ended September 30,2016.The subsidiary's financial statements reflect total assets of 22% and total revenues of 20% of the consolidated totals.Ball & Brown expressed an unqualified opinion and furnished to Smith & Jones a copy of their auditor report.Smith & Jones have decided not to assume responsibility for the work of Ball & Brown insofar as it relates to the expression of an opinion on the consolidated financial statements taken as a whole because of the materiality of Biotherm's financial statements to the consolidated whole.Ball & Brown's report will not be presented together with that of Smith & Jones.
• Concord is the subject of a grand jury investigation into possible violations of federal antitrust laws and possible related crimes.Related civil class actions are pending.Concord's management has adequately disclosed in Note 12 to their consolidated financial statements.Because of the early stage of the investigation,the ultimate outcome of these matters cannot be determined at this time.Therefore,no provision for any liability that may result has been recorded.
• Concord experienced a net loss in 2016 and is currently in default under substantially all of its debt agreements.Management's plans in regard to these matters are adequately disclosed in Note 14 to Concord's consolidated financial statements.The financials do not include any adjustments that might result from the outcome of this uncertainty.These matters rase substantial doubt about Concord's ability to continue as a going concern.
Ball reviewed Mary's draft and indicated in his review notes that there were many deficiencies in Mary's Draft.The audit report that Mary drafted follows.
Independent Auditor's Report
We have audited the consolidated financial statements of Concord,Inc.,and subsidiaries as of September 30,2016,and the related consolidated statements of income,changes in stockholders equity and cash flows for the year then ended.These financial statements are the responsibility of the Company's management.Our responsibility is to express an opinion on these financial statements based on our audits.We did not audit the financial statements of Biotherm,Inc.,a wholly-owned subsidiary,which statements reflect total assets and revenues constituting 22% and 20% respectively at September 30,2016 of the consolidated totals.Those statements were audited by Ball & Brown,CPAs,whose reports have been furnished to us,and our opinion,insofar as it relates to the amounts included for Biotherm,Inc.is based solely on their report.
We conducted our audit in accordance with generally accepted auditing standards.Those standards require that we plan and perform the audit to obtain reasonable 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 accounting principles used,as well as assessing control risk.We believe our audits provide a reasonable basis for our opinion.
In our opinion,based on our audit and the report of the other auditors,the consolidated financial statements referred to above present fairly,in all material respects,the financial position of Concord Inc.,as of September 30,2016 in conformity with generally accepted accounting principles,except for the uncertainty,which is discussed in Note 12 to the consolidated financials.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue in existence for a reasonable period of time.As discussed in Note 14 to the consolidated financial statements,the Company suffered a net loss and is currently in default under substantially all of its debt agreements.Management's plans in regard to these matters are also described in Note 14.The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Smith & Jones,CPAs
November 4,2016
Required:
The following items present some of the deficiencies in the drafted audit report noted by Smith.For each deficiency,indicate whether:
S.Smith's review note is correct
M.Mary's draft is correct
B.Both Smith's review note and Mary's draft are incorrect
Smith's Review Notes
1.An explanatory paragraph is required between the scope and opinion paragraphs for the change in accounting principles referring the reader to Note 10.
2.The names of the other auditors do not need to be explicitly stated in the introductory paragraph.Only that "other auditors" performed the audit and provided their report.
3.The opinion paragraph should extend the auditor's opinion beyond financial position to include the results of Concord's operations and flows.
4.The reference to the uncertainty in the opinion paragraph is incomplete.It should describe the nature of the uncertainty as pertaining to the grand jury investigation into possible violations of federal antitrust laws.
5.The explanatory paragraph following the opinion paragraph does not include the terms "substantial doubt" and "going concern".These terms are required to be used in this paragraph.
6.The explanatory paragraph following the opinion paragraph includes an inappropriate statement that "the consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty." This statement is misleading and should be omitted.

Accepted Answer

The answer of Smith and Jones,CPAs,audited the consolidated financial statements...

Question 2

Which of the following is correct regarding IFRS?

Accepted Answer

A) Companies that are required to file their financial statements with the SEC must follow IFRS starting in 2015. 
B) Recent developments suggest that the SEC may be slowing down its efforts towards adopting IFRS any time soon. 
C) When an auditor is engaged to report on financial statements prepared in accordance with IFRS,they must issue a qualified opinion. 
D) The introductory paragraph of the audit report is modified to indicate that the audit was conducted in accordance with International Standards on Auditing.

Question 3

Examples of unmodified opinions which contain modified wording (without adding an explanatory paragraph)include

Accepted Answer

A) the use of other auditors. 
B) the lack of consistent application of generally accepted accounting principles. 
C) substantial doubt about the audited company (or the entity)continuing as a going concern. 
D) lack of consistent application of GAAP.

Question 4

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?

Accepted Answer

A) error corrections not involving principles 
B) changes in accounting estimates 
C) variations in the format and presentation of financial information 
D) all of the above

Question 5

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

Accepted Answer

A) can issue an unqualified report. 
B) should issue a qualified opinion due to the departure from GAAP. 
C) should issue a qualified opinion because the missing statement of cash flows constitutes a scope limitation. 
D) should include the statement of cash flows,modify the report and issue an unqualified opinion.

Question 6

Auditors should issue a disclaimer of opinion when there is a highly material client-imposed scope restriction.

Accepted Answer

A) True 
 B)False

Question 7

Which of the following scenarios does not result in a qualified opinion?

Accepted Answer

A) A scope limitation prevents the auditor from completing an important audit procedure. 
B) Circumstances exist that prevent the auditor from conducting a complete audit. 
C) The auditor lacks independence with respect to the audited entity. 
D) An accounting principle at variance with GAAP is used.

Question 8

If most or all users' decisions that are based on the financial statements are likely to be significantly affected,the materiality level is

Accepted Answer

A) unrestricted. 
B) material. 
C) pervasive. 
D) risky.

Question 9

Indicate which changes would require an explanatory paragraph in the audit report.

Accepted Answer

A)   
B)   
C)   
D)

Question 10

If the balance sheet of a private company is dated December 31,2016,the audit report is dated February 8,2017,and both are released on February 15,2017,this indicates that the auditor has searched for subsequent events that occurred up to

Accepted Answer

A) December 31,2016. 
B) January 1,2017. 
C) February 8,2017. 
D) February 15,2017.

Question 11

The standard unmodified opinion audit report for a nonpublic entity must

Accepted Answer

A) have a report title that includes the word "CPA." 
B) be addressed to the company's stockholders and creditors. 
C) be dated. 
D) include an explanatory paragraph.

Question 12

As misstatements become more pervasive,the likelihood of issuing a disclaimer rather than a qualified opinion increases.

Accepted Answer

A) True 
 B)False

Question 13

The highest level of materiality exists when

Accepted Answer

A) users are likely to make incorrect decisions if they rely on the overall financial statements. 
B) there has been a departure from GAAP. 
C) amounts are material but do not overshadow the financial statements as a whole. 
D) a scope limitation has been imposed.

Question 14

What category of audit report will be issued if the auditor concludes that the financial statements are not fairly presented?

Accepted Answer

A) disclaimer 
B) qualified 
C) standard unmodified opinion 
D) adverse

Question 15

An item with a "psychological" effect (e.g.,where the item maintains an increasing earnings trend)is a qualitative factor that may affect the auditors decision regarding materiality.

Accepted Answer

A) True 
 B)False

Question 16

An auditor determines the financial statements include at least a material departure from GAAP.Which type of opinion may be issued?

Accepted Answer

A)   
B)   
C)   
D)

Question 17

Under AICPA auditing standards,the primary auditor issuing the opinion on the financial statements is called the

Accepted Answer

A) component auditor. 
B) principal auditor. 
C) group engagement partner. 
D) majority auditor.

Question 18

Whenever the client imposes restrictions on the scope of the audit,the auditor should be concerned that management may be trying to prevent discovery of misstatements.In such cases,the auditor will likely issue a

Accepted Answer

A) disclaimer of opinion in all cases. 
B) qualification of both scope and opinion in all cases. 
C) disclaimer of opinion whenever materiality is in question. 
D) qualification of both scope and opinion whenever materiality is in question.

Question 19

EPM,Inc.,is a private manufacturing company with a calendar year-end.Their financial statements include a balance sheet,a statement of income,statement of cash flows,and statement of stockholders' equity.For the most recent audit,Harrington and Perry,LLP,audited the 2015 and 2016 financial statements.The auditors completed all significant fieldwork on March 5,2017 and issued the audit report on March 16,2017.
Required:
Consider all the facts given and write the standard unmodified opinion audit report,including all eight sections of the report.

Accepted Answer

The answer of EPM,Inc.,is a private manufacturing company with a...

Question 20

It is typically more difficult to evaluate the materiality of potential misstatements resulting from a scope limitation than for failure to follow GAAP.

Accepted Answer

A) True 
 B)False

Exam 3: Audit Reports

Which of the following is correct regarding IFRS?

Examples of unmodified opinions which contain modified wording (without adding an explanatory paragraph) include

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?

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

Auditors should issue a disclaimer of opinion when there is a highly material client-imposed scope restriction.

Which of the following scenarios does not result in a qualified opinion?

If most or all users' decisions that are based on the financial statements are likely to be significantly affected,the materiality level is

Indicate which changes would require an explanatory paragraph in the audit report.

If the balance sheet of a private company is dated December 31,2016,the audit report is dated February 8,2017,and both are released on February 15,2017,this indicates that the auditor has searched for subsequent events that occurred up to

The standard unmodified opinion audit report for a nonpublic entity must

As misstatements become more pervasive,the likelihood of issuing a disclaimer rather than a qualified opinion increases.

The highest level of materiality exists when

What category of audit report will be issued if the auditor concludes that the financial statements are not fairly presented?

An item with a "psychological" effect (e.g.,where the item maintains an increasing earnings trend)is a qualitative factor that may affect the auditors decision regarding materiality.

An auditor determines the financial statements include at least a material departure from GAAP.Which type of opinion may be issued?

Under AICPA auditing standards,the primary auditor issuing the opinion on the financial statements is called the

Whenever the client imposes restrictions on the scope of the audit,the auditor should be concerned that management may be trying to prevent discovery of misstatements.In such cases,the auditor will likely issue a

It is typically more difficult to evaluate the materiality of potential misstatements resulting from a scope limitation than for failure to follow GAAP.