Auditors' Reports Answers Part 1

Auditors' Reports Answer Key True / False Questions 1. Audit reports should be dated the date on which the financial statements are issued. FALSE 2. When the auditors are unable to comply with generally accepted auditing standards, they should issue an opinion that is unqualified, but include an additional explanatory paragraph in the report. FALSE 3. When evaluating the results of audit tests, materiality depends upon both the dollar amount and the nature of the item. TRUE 4. A public company's financial statements should be prepared following standards of the Public Company Accounting Oversight Board. FALSE 17-22 Chapter 17 - Auditors' Reports 5. If financial statements fail to disclose a material fact, the auditors may disclose the information in an explanatory paragraph and issue an unqualified opinion on the statements. FALSE 6. If financial statements contain a material departure from generally accepted accounting principles, the auditors usually should not issue an unqualified opinion. TRUE 7. A "very material" change from one generally accepted accounting principle to another generally accepted accounting principle usually results in an adverse opinion by the auditors. FALSE 8. When there is a significant question about a company's ability to remain a going concern, the report issued is usually unqualified with an explanatory paragraph. TRUE 9. A client imposed scope limitation will generally result in a disclaimer of opinion. TRUE 10. Regulation S-X governs the form and content of financial statements filed with the SEC. TRUE 17-23 Chapter 17 - Auditors' Reports Multiple Choice Questions 11. Which of the following is not explicitly included in an audit report for a nonpublic company? A. A statement that he auditor believes that his or her audit provides a reasonable basis for expressing negative assurance. B. A statement that the auditor's responsibility is to express an opinion on the financial statements. C. A statement that the financial statements in the report are the responsibility of management. D. A title with the word "independent." 12. When an auditor has concluded there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time beyond the current financial statement date (9/30/X1), the auditor's responsibilit y includes: A. Preparing prospective financial information to verify whether management's plans can be effectively implemented. B. Projecting conditions and events from one year prior to this year's date (9/30/X0) to 9/30/X1. C. Issuing an adverse or negative assurance opinion, depending upon materiality, due to the possible effects on the financial statements. D. Considering the adequacy of disclosure about the entity's possible inability to continue as a going concern. 17-24 Chapter 17 - Auditors' Reports 13. When the auditor of a nonpublic company issues an adverse opinion an explanatory paragraph is added. In addition, which, if any, paragraphs to the report are modified? A. Option A B. Option B C. Option C D. Option D 14. When an auditor issues a qualified report on financial statements due to a scope limitation an explanatory paragraph is added. In addition, which, if any, paragraphs to the report are modified? A. Option A B. Option B C. Option C D. Option D 17-25 Chapter 17 - Auditors' Reports 15. When an auditor issues an unqualified report on financial statements, but adds an emphasis of a matter paragraph to the report, which, if any, paragraphs to the report are modified? A. Option A B. Option B C. Option C D. Option D 16. An explanatory paragraph relating to a scope limitation in the audit of the financial statements of a nonpublic company should be placed A. After the opinion paragraph. B. Prior to the opinion paragraph. C. Either before or after the opinion paragraph. D. An audit report modified for a scope limitation does not include an explanatory paragraph. 17. After considering an entity's negative trends and financial difficulties, an auditor has substantial doubt about the entity's ability to continue as a going concern. The auditor's considerations relating to management's plans for dealing with the adverse effects of these conditions most likely would include management's plans to: A. Increase current dividend distributions. B. Reduce existing lines of credit. C. Increase ownership equity. D. Purchase assets formerly leased. 17-26 Chapter 17 - Auditors' Reports 18. When an auditor of financial statements does not confirm material accounts receivable, but is satisfied by the application of alternative auditing procedures, she normally should: A. Issue an unqualified opinion, but disclose elsewhere in the report this departure from a customary procedure. B. Issue an unqualified opinion with no reference to this omission but be prepared to defend the action. C. Issue a qualified opinion or a disclaimer, depending on the materiality of the receivables. D. Issue an adverse opinion. 19. When an auditor of financial statements has substantial doubt about an entity's ability to continue as a going concern because of the probable discontinuance of operations, the auditor most likely would express a qualified opinion if A. The effects of the adverse financial conditions likely will cause a bankruptcy filing. B. Information about the entity's ability to continue as a going concern is not disclosed. C. Management has no plans to reduce or delay future expenditures. D. Negative trends and recurring operating losses appear to be irreversible. 20. An auditor of financial statements believes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. In evaluating the entity's plans for dealing with the adverse effects of future conditions and events, the auditor most likely would consider, as a mitigating factor, the entity's plans to A. Repurchase the entity's stock at a price below its book value. B. Issue stock options to key executives. C. Lease rather than purchase operating facilities. D. Accelerate the due date of an existing mortgage. 17-27 Chapter 17 - Auditors' Reports 21. Which of the following 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? A. Performing cutoff tests of sales transactions with customers with long-standing receivable balances. B. Evaluating the entity's procedures for identifying and recording related party transactions. C. Inspecting title documents to verify whether any real property is pledged as collateral. D. Inquiring of the entity's legal counsel about litigation, claims, and assessments. 22. When a client declines to disclose essential information in the financial statements or notes, the auditor of the financial statements should: A. Provide the information in the audit report, if practicable, and qualify the opinion because of a limitation on the scope of the audit. B. Provide the information in the audit report, if practicable, and qualify the opinion because of a departure from GAAP. C. Issue a disclaimer of opinion because the client has interfered with the auditor's function of assessing the adequacy of disclosure. D. Issue an unqualified opinion, but inform the reader by including the omitted information in the audit report. 23. CPA Firm A has performed most of the audit of Consolidated Company's financial statements and qualifies as the principal auditor. CPA Firm B did the remainder of the work. Firm A wishes to assume full responsibility for Firm B's work. Which of the following statements is correct? A. Such assumption of responsibility violates the profession's standards. B. In such circumstances, when appropriate requirements have been met, Firm A should issue a standard unqualified opinion on the financial statements. C. In such circumstances, when appropriate requirements have been met, Firm A should issue an unqualified opinion on the financial statements but should make appropriate reference to Firm B in the audit report. D. CPA firm A should normally qualify its audit report on the basis of the scope limitation involved when another CPA firm is involved. 17-28 Chapter 17 - Auditors' Reports 24. Which of the following is most accurate with respect to a CPA's responsibility in considering a going concern question on financial statement audits? A. Perform analytical procedures aimed particularly at assessing whether bankruptcy is probable. B. Issue a report with a "going concern" modification when failure is at least reasonably probable. C. Based on audit procedures performed, assess whether there is substantial doubt about the entity's ability to continue as a going concern. D. Determine that related uncertainties are properly disclosed and make no mention in the audit report. 25. The Rotter Company changed accounting principles in 20X4 from those followed in 20X3. The auditor believes that the new principles are not in conformity with GAAP, and therefore that the 20X4 financial statements are misleading. The change (including its dollar effect) has been described in the notes to the 20X4 statements, which are being presented by themselves. Under these circumstances, in reporting on the 20X4 financial statements, the auditor should: A. Express an adverse opinion with an explanatory paragraph disclosing the reason (the accounting change) for the opinion. B. Express an unqualified opinion with an explanatory paragraph and disclose the accounting change from 20X3 and its effect on the financial statements. C. Disclaim an opinion and explain all of the reasons therefore. D. Express an adverse opinion regarding the 20X4 financial statements, without an explanatory paragraph disclosing the reason therefore since it will be included in the notes to the statements. 26. When financial statements are affected by a material departure from generally accepted accounting principles, the auditors should: A. Issue an unqualified report with an explanatory paragraph. B. Withdraw from the engagement. C. Issue an "except for" qualification or an adverse opinion. D. Issue an "except for" qualification or a disclaimer of opinion. 17-29 Chapter 17 - Auditors' Reports 27. Which of the following accounting changes requires explanatory language regarding consistency in the auditors' report? A. A change in the estimated useful lives of a class of fixed assets. B. A write-off of a patent because future benefits do not appear to exist. C. A change from the straight line method of depreciation to an accelerated method for a class of fixed assets. D. A change in calculating bad debt expense from one percent to two percent of credit sales. 28. The first paragraph of a standard unqualified audit report for a nonpublic client is referred to as the: A. Introductory paragraph. B. Scope paragraph. C. Opinion paragraph. D. Explanatory paragraph. 29. A scope restriction is least likely to result in a(an): A. Qualified opinion. B. Disclaimer of opinion. C. Adverse opinion. D. Standard unqualified opinion. 30. Which of the following is least likely to result in explanatory language being added to an unqualified auditor's report on the financial statements of a client that sells jewelry through a retail store? A. A decision by the auditor to emphasize that the client is a part of a larger organization. B. Reliance placed upon a specialist to evaluate the diamonds. C. A change from FIFO to specific identification accounting for inventory. D. A question as to whether the client will be able to remain a going concern. 17-30 Chapter 17 - Auditors' Reports 31. Which of the following statements is correct with respect to explanatory paragraphs in reports on audits of the financial statements of nonpublic companies? A. They always precede the opinion paragraph. B. They always follow the opinion paragraph. C. Sometimes they precede and sometimes they follow the opinion paragraph. D. They always precede the scope paragraph. 32. A client has changed the salvage values of a number of its fixed assets. The auditors believe that the salvage values are realistic. The appropriate report on the financial statements is: A. Standard unqualified. B. Unqualified with explanatory language as to consistency. C. Qualified for consistency. D. Disclaimer. 33. Which of the following would be most likely to be an appropriate addressee for an audit report? A. The shareholders of the corporation whose financial statements were examined. B. A third party who requested that a copy of the audit report be sent to her. C. The president of the corporation whose financial statements were examined. D. The chief financial officer. 34. The term "except for" in an audit report is: A. Used in an adverse opinion. B. No longer considered appropriate. C. Used in a qualified opinion D. Used for an unqualified opinion when an explanatory paragraph is added. 17-31 Chapter 17 - Auditors' Reports 35. The unqualified standard audit report of a nonpublic company does not explicitly state that: A. The financial statements are the responsibility of the company's management. B. The audit was conducted in accordance with accounting principles generally accepted in the United States of America. C. The auditors believe that the audit provides a reasonable basis for their opinion. D. An audit includes assessing the accounting principles used. 36. Which of the following is not a difference between the audit report of a nonpublic and public company? A. The nonpublic company report includes the word "Registered" in the title. B. The nonpublic company report refers to standards of the PCAOB. C. The nonpublic company report has an additional paragraph referring to the client's fraud prevention procedures. D. The nonpublic company report must include the city and state in which the report has been issued. 37. If audited financial statements include a balance sheet and an income statement, but do not include a statement of cash flows: A. The auditors may still issue an unqualified opinion. B. The auditors should issue an "except for" qualification for the departure from generally accepted accounting principles. C. The auditors should issue an opinion "subject to" the information that would have been contained in the statement of cash flows. D. The auditors should refuse to issue an opinion on only the two financial statements. 17-32 Chapter 17 - Auditors' Reports 38. Which of the following circumstances generally results in the issuance of a report that is other than unqualified? A. Circumstances have significantly limited the scope of the auditors' procedures. B. The principal auditors for the engagement are relying on the work of other auditors. C. The financial statements depart from a standard established by the FASB because the auditors have concluded that application of the standard would result in materially misleading financial statements. D. The auditors have decided to emphasize the fact that the company has engaged in material amounts of related party transactions. 39. Which of the following modifications of the auditors' report does not include an additional paragraph? A. The report is qualified because the financial statements contain a material departure from generally accepted accounting principles. B. The report includes an emphasis of a matter. C. The audit report indicates a division of responsibility between two CPA firms. D. The report is qualified because the scope of the auditors' work was restricted. 40. If the predecessor auditors fail to reissue their audit report on comparative financial statements the successor auditors should: A. Express a qualified opinion on the comparative financial statements audited by the predecessor auditors. B. Reproduce the predecessor auditors' report and include it with the new set of financial statements. C. Have the client omit the comparative financial statements. D. Refer to the report of the predecessor auditors. 17-33 Chapter 17 - Auditors' Reports 41. An audit client has refused to allow the auditors to perform a generally accepted auditing procedure. The circumstance would normally result in the issuance of: A. A disclaimer of opinion. B. An adverse opinion. C. An "except for" qualification of the report. D. An unqualified report with explanatory language. 42. Which of the following is a "registration statement" that is filed with the SEC by a company planning to issue securities to the public? A. Form 8-K. B. Form S-1. C. Form 10-Q. D. Form 10-K. 43. If principal auditors make no reference to other auditors whose work they have relied on as a part of the basis for their report, the principal auditors: A. Are not required to investigate the professional reputation of the other auditors. B. Are issuing an inappropriate report. C. Are assuming full responsibility for the work of the other auditors. D. Are issuing a qualified opinion. 44. After performing all necessary procedures the predecessor auditors reissue a prior-period report on financial statements at the request of the client without revising the original wording. The predecessor auditors should: A. Delete the date of the report. B. Dual-date the report. C. Use the reissue date. D. Use the date of the previous report. 17-34 Chapter 17 - Auditors' Reports 45. When an adverse opinion is expressed, the opinion paragraph should include a direct reference to: A. A note to the financial statements which discusses the basis for the opinion. B. The scope paragraph which discusses the basis for the opinion rendered. C. A separate paragraph which discusses the basis for the opinion rendered. D. The consistency in the application of generally accepted accounting principles. 46. Under which of the following set of circumstances might the auditors disclaim an opinion? A. The financial statements contain a departure from generally accepted accounting principles, the effect of which is material. B. The principal auditors decide to make reference to the report of another auditor who audited a subsidiary. C. There has been a material change between periods in the method of application of accounting principles. D. There are significant scope limitations on the audit. 47. The management of Stanley Corporation has decided not to account for a material transaction in accordance with the provisions of a recent statement of the FASB. They have set forth their reasons in note "B" of the financial statements, which clearly demonstrates that due to unusual circumstances the financial statements would otherwise have been misleading. The auditors' report on the financial statements will probably contain a(an): A. Qualified opinion and an explanatory paragraph with a reference to note "B". B. Unqualified opinion and an explanatory paragraph. C. Adverse opinion and an explanatory paragraph. D. "Except for" opinion and an explanatory paragraph. 17-35