Question 1

Which of the following would be considered a change that affects comparability and requires an explanatory paragraph?

Accepted Answer

A)  Change in accounting estimate.
B)  Change in accounting principle.
C)  Change in classification from one acceptable classification to another.
D)  All of the other options are correct. B

Question 2

When there has been a change in accounting principle that materially affects the comparability of the comparative financial statements presented for a public company and the auditor concurs with the change, the auditor should:

Accepted Answer

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

Question 3

An auditor includes a separate paragraph in an otherwise unmodified report 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 an "except for" 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 paragraph to include the phrase "with the foregoing explanation."
D)  is appropriate and would not negate the unqualified opinion. D

Question 4

When an auditor expresses an adverse opinion, the opinion paragraph should include:

Accepted Answer

A)  the principal effects of the departure from generally accepted accounting principles.
B)  a statement that the financial statements do not present fairly.
C)  the substantive reasons for the financial statements being misleading.
D)  a description of the uncertainty or scope limitation that prevents an unqualified opinion.

Question 5

A basic assumption that underlies financial reporting is that an entity will continue as a going concern.

Accepted Answer

A) True 
 B)False

Question 6

Management believes, and the auditor is satisfied, that a material loss probably will occur when pending litigation is resolved. Management is unable to make a reasonable estimate of the amount or range of the potential loss, but fully discloses the situation in the notes to the financial statements. If the auditor wishes to call attention to the matter and management does not make an accrual in the financial statements, the auditor should issue a(n):

Accepted Answer

A)  qualified report due to a scope limitation.
B)  qualified report due to a departure from GAAP.
C)  unqualified report with an explanatory paragraph.
D)  standard unmodified auditor's report.

Question 7

In an engagement to express an opinion on one or more specified elements, accounts, or items of a financial statement, the auditor can generally audit only those specified elements and not the entire set of financial statements. However, the auditor is required to audit the entire set of financial statements if the elements specified include:

Accepted Answer

A)  net income.
B)  stockholders' equity.
C)  net income and stockholders' equity.
D)  assets.

Question 8

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 an entity's annual report except:

Accepted Answer

A)  the auditor is under no obligation to perform audit procedures on this other information.
B)  the auditor must consider whether the other information is consistent with the information contained in the audited financial statements.
C)  the auditor must request that material inconsistencies be corrected.
D)  the auditor must perform audit procedures on this other information.

Question 9

In which of the following situations would an auditor ordinarily choose between expressing an "except for" qualified opinion and expressing an adverse opinion?

Accepted Answer

A)  The auditor did not observe the entity's physical inventory and is 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 auditor's opinion is based in part on the report of another auditor.
D)  Events disclosed in the financial statements cause the auditor to have substantial doubt about the entity's ability to continue as a going concern.

Question 10

When expressing an opinion on a specified account or item in the financial statements, the auditor need only consider that account or item. However, the auditor must have audited the entire set of financial statements if this engagement requires a report on the entity's:

Accepted Answer

A)  net income.
B)  retained earnings.
C)  assets.
D)  working capital.

Question 11

When comparative financial statements are presented, the auditor's report should be considered to apply to the financial statements of the:

Accepted Answer

A)  periods presented plus the one preceding period.
B)  current period only.
C)  current period and those of the other periods presented.
D)  current and immediately preceding period only.

Question 12

An engagement to express an opinion on a system of internal control will generally:

Accepted Answer

A)  only require those procedures already applied in assessing control risk during a financial statement audit.
B)  increase the reliability of the financial statements that have already been audited.
C)  be more extensive in scope than the assessment of control risk made during a financial statement audit.
D)  be more limited in scope than the assessment of control risk made during a financial statement audit.

Question 13

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 entity refuses to revise or eliminate the material inconsistency, the auditor may:

Accepted Answer

A)  issue an "except for" qualified opinion after discussing the matter with the entity's board of directors.
B)  consider the matter closed since the other information is not in the audited financial statements.
C)  disclaim an opinion on the financial statements after explaining the material inconsistency in a separate explanatory/emphasis-of-matter paragraph.
D)  revise the auditor's report to include a separate explanatory (or other matter) paragraph describing the material inconsistency.

Question 14

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

Accepted Answer

A)  A change in the method of accounting for inventories.
B)  A change from an accounting principle that is not generally accepted to one that is generally accepted.
C)  A change in the service life used to calculate depreciation expense.
D)  A correction of a material misstatement in previously issued financial statements.

Question 15

Comparative financial statements include the financial statements of a prior period that were examined by a predecessor auditor whose report is not presented. If the predecessor auditor's report was qualified, the successor auditor must:

Accepted Answer

A)  obtain written approval from the predecessor auditor to include the prior year's financial statements.
B)  issue a standard comparative audit report indicating the division of responsibility.
C)  express an opinion on the current year statements alone and make no reference to the prior year statements.
D)  disclose the nature of and reasons for any qualification in the predecessor auditor's opinion.

Question 16

A correction of a material misstatement in previously issued financial statements is an example of an accounting change that affects comparability and requires an explanatory paragraph in the audit report.

Accepted Answer

A) True 
 B)False

Question 17

Changes in an entity's accounting choices either affect comparability 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. A change from the inappropriate use or application of accounting principle in prior years to an acceptable accounting principle in the current year.
3. A change from an incorrect to a correct classification of transactions or balances on the financial statements.
4. Reclassification from an acceptable classification to another.
5. Change in accounting principle.
6. An adjustment to account balances to correct a material error in previously issued financial statements.

Accepted Answer

The answer of Changes in an entity's accounting choices either...

Question 18

The predecessor auditor, after properly communicating with the successor auditor, has reissued a report because the entity desires comparative financial statements. The predecessor auditor's report should make:

Accepted Answer

A)  no reference to the report or the work of the successor auditor.
B)  reference to the work of the successor auditor in the scope paragraph.
C)  reference to both the work and the report of the successor auditor in the opinion paragraph.
D)  reference to the report of the successor auditor in the scope paragraph.

Question 19

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 non-public company standard auditor's report for these situations?

Accepted Answer

The answer of Identify the special purpose framework used in...

Question 20

What is an auditor's responsibility for supplementary information, such as segment information, that is outside the basic financial statements, but required by the FASB?

Accepted Answer

A)  The auditor has no responsibility for required supplementary information as long as it is outside the basic financial statements.
B)  The auditor's only responsibility for required supplementary information is to assist in preparing the supplementary information.
C)  The auditor is required to read the other information and consider whether such information is consistent with the information in the financial statements.
D)  The auditor should apply tests of details of transactions and balances to the required supplementary information and report any material misstatements in such information.

Exam 18: Reports on Audited Financial Statements

Which of the following would be considered a change that affects comparability and requires an explanatory paragraph?

When there has been a change in accounting principle that materially affects the comparability of the comparative financial statements presented for a public company and the auditor concurs with the change, the auditor should:

An auditor includes a separate paragraph in an otherwise unmodified report to emphasize that the entity being reported on had significant transactions with related parties. The inclusion of this separate paragraph:

When an auditor expresses an adverse opinion, the opinion paragraph should include:

A basic assumption that underlies financial reporting is that an entity will continue as a going concern.

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 an entity's annual report except:

In which of the following situations would an auditor ordinarily choose between expressing an "except for" qualified opinion and expressing an adverse opinion?

When expressing an opinion on a specified account or item in the financial statements, the auditor need only consider that account or item. However, the auditor must have audited the entire set of financial statements if this engagement requires a report on the entity's:

When comparative financial statements are presented, the auditor's report should be considered to apply to the financial statements of the:

An engagement to express an opinion on a system of internal control will generally:

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

Comparative financial statements include the financial statements of a prior period that were examined by a predecessor auditor whose report is not presented. If the predecessor auditor's report was qualified, the successor auditor must:

A correction of a material misstatement in previously issued financial statements is an example of an accounting change that affects comparability and requires an explanatory paragraph in the audit report.

The predecessor auditor, after properly communicating with the successor auditor, has reissued a report because the entity desires comparative financial statements. The predecessor auditor's report should make:

What is an auditor's responsibility for supplementary information, such as segment information, that is outside the basic financial statements, but required by the FASB?