Auditors' Reports Answers Part 2

Chapter 17 - Auditors' Reports 48. The auditors include explanatory language in an otherwise unqualified report in order to emphasize that the entity being reported upon is a subsidiary of another business enterprise. The inclusion of this explanatory language: A. Is appropriate and would not negate the unqualified opinion. B. Is considered a qualification of the report. C. Is a violation of generally accepted reporting standards if this information is disclosed in notes to the financial statements. D. Necessitates a revision of the opinion paragraph to include the phrase "with the foregoing explanation." 49. It is not appropriate for the auditors' report to refer a reader to a financial statement note for details regarding a(an): A. Change in accounting principle. B. Limitation in the scope of the audit. C. Uncertainty. D. Related party transaction. 50. Which of the following best describes the reference to the expression "taken as a whole" in the fourth generally accepted auditing standard of reporting? A. It applies equally to a complete set of financial statements and to each individual financial statement. B. It applies only to a complete set of financial statements. C. It applies equally to each item in each financial statement. D. It applies equally to each material item in each financial statement. 17-36 Chapter 17 - Auditors' Reports 51. Which of the following will not result in qualification of the auditors' report due to a scope limitation? A. Restrictions imposed by the client. B. Reliance placed upon the report of other auditors. C. Inability to obtain sufficient competent evidential matter. D. Inadequacy in the accounting records. 52. For a continuing audit client, when a complete set of financial statements is presented on a comparative basis for two years, the auditors' opinion would refer to: A. Only the current year under audit. B. Either one or both years at the option of the auditors. C. Each of the two years plus the preceding year. D. Each of the years in the two-year period. 53. Which of the following representations does an auditor make explicitly and which implicitly when issuing an unqualified opinion on public company financial statements? A. Option A B. Option B C. Option C D. Option D 17-37 Chapter 17 - Auditors' Reports 54. For a particular entity's financial statements to be presented fairly in conformity with generally accepted accounting principles, it is not required that the principles selected: A. Be appropriate in the circumstances for the particular entity. B. Reflect transactions in a manner that presents the financial statements within a range of acceptable limits. C. Present information in the financial statements that is classified and summarized in a reasonable manner. D. Be applied on a basis consistent with those followed in the prior year. 55. In which of the following circumstances would an adverse opinion be appropriate? A. The auditor is not independent with respect to the enterprise being audited. B. The statements are not in conformity with generally accepted accounting principles because they omit a statement of changes in financial position. C. The statements are not in conformity with generally accepted accounting principles regarding pension plans. D. A client-imposed scope limitation prevents the auditor from complying with generally accepted auditing standards. 56. An independent auditor has concluded that a substantial doubt remains about a client's ability to continue as a going concern, but the client's financial statements have properly disclosed all of its solvency problems. The auditor would probably issue a(an): A. Unqualified opinion with an appropriate explanatory paragraph. B. "Except for" qualified opinion. C. Standard unqualified opinion. D. Adverse opinion. 17-38 Chapter 17 - Auditors' Reports 57. A limitation on the scope of the audit sufficient to preclude an unqualified opinion will always result when management: A. Asks the auditor to report on the balance sheet and not on the other basic financial statements. B. Refuses to permit its lawyer to respond to the letter of audit inquiry. C. Discloses material related party transactions in the notes to the financial statements. D. Knows that confirmation of accounts receivable is not feasible. 58. Doe, an independent auditor, was engaged to perform an audit of the financial statements of Ally Incorporated one month after its fiscal year had ended. Although the inventory count was not observed by Doe, and accounts receivable were not confirmed by direct communication with debtors, Doe was able to gain satisfaction by applying alternative auditing procedures. Doe's audit report will probably contain: A. A standard unqualified opinion. B. An unqualified opinion and an explanatory paragraph. C. Either a qualified opinion or a disclaimer of opinion. D. An "except for" qualification. 59. The fourth reporting standard requires the auditor's report to contain either an expression of opinion regarding the financial statements, taken as a whole, or an assertion to the effect that an opinion cannot be expressed. The objective of the fourth standard is to prevent: A. The CPA from reporting on one basic financial statement and not the others. B. Misinterpretations regarding the degree of responsibility that the auditor is assuming. C. The CPA from expressing different opinions on each of the basic financial statements. D. Management from reducing its final responsibility for the basic financial statements. 17-39 Chapter 17 - Auditors' Reports 60. The principal auditor is satisfied with the independence and professional reputation of the other auditor who has audited a subsidiary. To indicate the division of responsibility, the principal auditor should modify: A. The introductory, scope, and opinion paragraphs of the report. B. Only the scope paragraph of the report. C. Only the opinion paragraph of the report. D. Only the opinion paragraph of the report and include an explanatory paragraph. 61. Morgan, CPA, is the principal auditor for a multinational corporation. Another CPA has examined and reported on the financial statements of a significant subsidiary of the corporation. Morgan is satisfied with the independence and professional reputation of the other auditor, as well as the quality of the other auditor's audit. With respect to Morgan's report on the consolidated financial statements, taken as a whole, Morgan: A. Must not refer to the audit of the other CPA. B. Must refer to the audit of the other CPA. C. May refer to the audit of the other CPA. D. May refer to the audit of the other CPA, in which case Morgan must include in the audit report on the consolidated financial statements a qualified opinion with respect to the audit of the other CPA. 62. When reporting on comparative financial statements where the financial statements of the prior period have been examined by a predecessor auditor whose report is not presented, the successor auditor should indicate in the report: A. The reasons why the predecessor auditor's report is not presented. B. The identity of the predecessor auditor who examined the financial statements of the prior year. C. Whether the predecessor auditor's review of the current year's financial statements revealed any matter that might have a material effect on the successor auditor's opinion. D. The type of opinion expressed by the predecessor auditor. 17-40 Chapter 17 - Auditors' Reports 63. If an accounting change has no material effect on the financial statements in the current year, but the change is reasonably certain to have a material effect in later years, the change should be: A. Referred to in the auditor's report for the current year. B. Disclosed in the notes to the financial statements of the current year. C. Disclosed in the notes to the financial statements and referred to in the auditor's report for the current year. D. Treated as a subsequent event. 64. When financial statements of a prior period are presented on a comparative basis with financial statements of the current period, the continuing auditor is responsible for: A. Expressing dual dated opinions. B. Updating the report on the previous financial statements only if there has not been a change in the opinion. C. Updating the report on the previous financial statements only if the previous report was qualified and the reasons for the qualification no longer exist. D. Updating the report on the previous financial statements regardless of the opinion previously issued. 65. An auditor has been asked to report on the balance sheet of Kane Company but not on the other basic financial statements. The auditor will have access to all information underlying the basic financial statements. Under these circumstances, the auditor: A. May accept the engagement because such engagements merely involve limited reporting objectives. B. May accept the engagement but should disclaim an opinion because of an inability to apply the procedures considered necessary. C. Should refuse the engagement because there is a client-imposed scope limitation. D. Should refuse the engagement because of a departure from generally accepted auditing standards. 17-41 Chapter 17 - Auditors' Reports 66. When the auditor is unable to determine the amounts associated with the illegal acts of client personnel because of an inability to obtain adequate evidence, the auditor should issue a(an): A. "Subject to" qualified opinion. B. Disclaimer of opinion. C. Adverse opinion. D. Unqualified opinion with a separate explanatory paragraph. 67. If the principal auditor decides to make reference to the other auditor's audit, the introductory paragraph must specifically indicate the: A. Magnitude of the portion of the financial statements examined by the other auditor. B. Name of the other auditor. C. Name of the consolidated subsidiary examined by the other auditor. D. Type of opinion expressed by the other auditor. 68. Which of the following will result in explanatory language as to consistency in the auditor's report, regardless of whether the item is fully disclosed in the financial statements? A. A change in accounting estimate. B. A change from an unacceptable accounting principle to a generally accepted one. C. Correction of an error not involving a change in accounting principle. D. A change in classification. 17-42 Chapter 17 - Auditors' Reports 69. An auditor's report on comparative financial statements should be dated as of the date of the: A. Issuance of the report. B. Accumulation of sufficient appropriate audit evidence. C. Latest financial statements being reported on. D. Last related-party transaction disclosed in the statements. 70. In which of the following circumstances would an auditor of financial statements be most likely to express an adverse opinion? A. The statements are not in conformity with the FASB Statements regarding the capitalization of leases. B. Information comes to the auditor's attention that raises substantial doubt about the entity's ability to continue in existence. C. The chief executive officer refuses the auditor access to minutes of board of directors' meetings. D. Tests of controls show that the entity's internal control is so poor that it can not be relied upon. 17-43 Chapter 17 - Auditors' Reports 71. William & Plaud are principle auditors for the Lowell Corporation. One of the subsidiaries of Lowell Corporation, Wilson Manufacturing Co., is audited by Lyle & Adams. a. If William & Plaud make reference in their report to reliance on the report of other auditors are they qualifying their opinion? Explain. b. Regardless of whether William & Plaud make reference to reliance on the report of the other auditors, they should perform certain procedures with respect to Lyle and Adams' audit. What are these procedures? a. No. The auditors are indicating a division of responsibility between them and the other auditors. b. The auditors should: Make inquiries concerning the other auditors' professional reputation. Obtain a letter from the other auditors stating that they are aware of the use of their report and that they are independent with respect to the client. 72. Upon completing an audit, the auditors should issue an opinion on the client's financial statements. a. List the conditions that permit the issuance of an unqualified opinion on the financial statements. b. Describe three situations in which the auditors may modify their standard report and still issue an unqualified opinion. a. The conditions that permit issuance of an unqualified opinion include: 1. The financial statements are presented in conformity with generally accepted accounting principles, including adequate disclosure. 2. The audit was performed in accordance with generally accepted auditing standards and there were no significant scope limitations preventing the auditors from gathering the evidence necessary to support their opinion. b. Modifications of the auditors' report that do not result in qualification include (only three required): Reliance upon other auditors (shared responsibility audits). Emphasis of a matter. Departure from an officially recognized accounting principle because application would result in materially misleading financial statements. A question about a company's ability to remain a going concern. GAAP not consistently applied. 17-44 Chapter 17 - Auditors' Reports 73. Identify the deficiencies (including both incorrect statements and omissions) contained in the auditors' report on a nonpublic company as drafted below. You will receive credit for those you properly identify, and lose credit for those you identify which aren't actually deficiencies. Auditors' Report To the Board of Directors and Management XYZ Company We have reviewed the consolidated balance sheet of XYZ Company as of December 31, 20XX, and the related statements of income, retained earnings, and cash flows for the year then ended. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted accounting standards. Those standards require that we plan and perform the audit to obtain absolute 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 and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present the financial position of XYZ Company as of December 31, 20XX, and the results of operations and its cash flows for the year then ended in conformity with auditing standards generally accepted in the United States of America applied on a consistent basis with the preceding year. Art Youngster & Co. Certified Public Accountants Phoenix, Arizona December 31, 20XX The report contains the following deficiencies: 1. Introductory paragraph In sentence 1, the word "reviewed" should be "audited." The sentence on the responsibility of management is omitted. 2. Scope Paragraph Sentence 1 should state that the audit was performed in accordance with auditing standards generally accepted in the United States of America. Sentence 2 should state that an audit provides "reasonable," not "absolute" assurance. 3. Opinion Paragraph "Auditing standards" should be "accounting principles." No mention of consistency should be made. 17-45 Chapter 17 - Auditors' Reports 4. Other The word "independent" should be included in the report's title. The report should be dated as of the last day of field work, not the last day of the year being audited. 17-46 Chapter 17 - Auditors' Reports 74. Use the accompanying solution sheet to reply to all of the situations below that relate to the audit of financial statements of nonpublic companies. Unless indicated otherwise, assume that material amounts are involved. A company has departed from GAAP for what the auditor considers to be unjustified reasons. A company's inventory records were deficient and the auditor was required to satisfy herself that the inventory was properly stated using alternative procedures. She is satisfied with the results of those procedures. In auditing a client, an auditor has determined that substantial doubt exists about an entity's ability to continue as a going concern. A principal auditor decides not to take responsibility for the work of another CPA who audited a 70% owned subsidiary and issued an unqualified opinion. The total assets and revenues of the subsidiary are 5% and 8%, respectively, of the total assets and revenues of the entity being audited. A company changes from FIFO to LIFO for inventory valuation and the auditor concurs with the change. The change has a material effect on the comparability of the entity's financial statements this year, but is expected to have an immaterial effect in the future. A client is issuing two years of comparative financial statements. The first year was audited by another auditor who, after performing the appropriate procedures, has updated and reissued her audit report. (NOTE: You are replying as to the proper report to be issued at the end of the second year.)[3] A company has included incorrect other information in a client prepared document containing audited statements. The financial statements are correct, but the president's letter is incorrect. A client has changed its estimate of likely doubtful accounts from 2% of credit sales to 3%. The auditor believes the change to be reasonable.[2] Reply as to the following three factors relating to the appropriate audit report(s) for each of the situations. More than one type of opinion and placement of explanatory paragraph reply may be appropriate. Circumstances--Other auditors, going concern, consistency, emphasis of a matter, justified departure from GAAP, unjustified departure from GAAP, Scope Limitation (1 of these must be selected except for numbers 6 and 7). 17-47 Chapter 17 - Auditors' Reports Types of Opinion A. Standard unqualified B. Unqualified with an explanatory paragraph C. Unqualified with explanatory language, but no explanatory paragraph. D. Qualified E. Disclaimer F. Adverse If more than one type of opinion is appropriate list each. Placement of explanatory paragraph--before opinion paragraph, after opinion paragraph, either before or after the opinion paragraph, not applicable since there is no explanatory paragraph. (If more than one type of opinion was appropriate, provide a separate reply for placement of explanatory paragraph for each.) 17-48