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Roger CPA Review Page 7-35

(Lecture 7.09) CLASS QUESTIONS: 1. Which

a. The disclosures provide reasonable assurance that the financial statements are free of material misstatement.

b. The auditor tested the overall internal control. c. An audit includes evaluating the reasonableness of significant estimates made by

management. d. The financial statements are consistent with those of the prior period.

2. of a nonissuer

should refer to auditing standards generally accepted in the U.S. and Principles generally accepted in the U.S.?

Auditing standards generally Principles generally accepted in the U.S. accepted in the U.S. a. Intro (report on F/S) Managements Responsibility b. Responsibility c. Opinion d. Intro Opinion 3. In which paragraph of a standard unmodified report is a disclaimer on internal control

mentioned? a. Report on the Financial Statements (Intro) b. ility for the Financial Statements c. d. Opinion 4.

financial statements adequately disclose its financial difficulties,

Include an Emphasis of a Specifically Matter Paragraph Specifically use the following the use the words opinion wor paragraph

a. Yes Yes Yes b. Yes Yes No c. Yes No Yes d. No Yes Yes

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5. For which of the following events would an auditor issue a report that omits any reference to consistency?

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 useful life used to calculate the provision for depreciation expense. d.

6. Under which of the following circumstances would a disclaimer of opinion not be

appropriate? a. The auditor is unable to determine the amounts associated with an employee fraud

scheme. b. Management does not provide reasonable justification for a change in accounting

principles. c. The client refuses to permit the auditor to confirm certain accounts receivable or

apply alternative procedures to verify their balances. d. The chief executive officer is unwilling to sign the management representation letter.

7.

statements, has not been properly accounted for or disclosed. Depending on the materiality of the effect on the financial statements, the auditor should express either a(n)

a. Adverse opinion or a disclaimer of opinion. b. Qualified opinion or an adverse opinion. c. Disclaimer of opinion or an unmodified opinion with a separate explanatory

paragraph. d. Unmodified opinion with a separate explanatory paragraph or a qualified opinion.

8. When an auditor qualifies an opinion in an audit of an issuer under PCAOB because of

inadequate disclosure, the auditor should describe the nature of the omission in a separate explanatory paragraph and modify the

Introductory Scope Opinion Paragraph Paragraph Paragraph a. Yes No No b. Yes Yes No c. No Yes Yes d. No No Yes 9. Park, CPA, was engaged to audit the financial statements of Tech Co., a new client, for the

records, Par

Balance sheet Income statement a. Disclaimer Disclaimer b Unmodified Disclaimer c. Disclaimer Adverse d. Unmodified Adverse



10. When

are adjusted? Auditor Responsibility Opinion Paragraph Paragraph a. No Yes b. Yes Yes c. No No d. Yes No 11. A scope limitation sufficient to preclude an unmodified opinion always will result when

management

a. Prevents the auditor from reviewing the working papers of the predecessor auditor. b. Engages the auditor after the year-end physical inventory is completed. c. Requests that certain material accounts receivable not be confirmed. d. Refuses to acknowledge its responsibility for the fair presentation of the financial

statements in conformity with GAAP.

12. An auditor should disclose the reasons for exp

a. . b. Preceding the opinion paragraph. c. Following the opinion paragraph. d. Within the notes to the financial statements.



(7.05) CLASS Task-based Simulation 1

Audit Opinion Authoritative Literature Help Cut Copy Paste

Required: Items 1 through 7 present various independent factual situations an auditor might encounter in conducting an audit. List A represents the types of opinions the auditor ordinarily would issue and List B represents the report modifications (if any) that would be necessary. For each situation, select one response from List A and one from List B. Select as the best answer for each item, the action the auditor normally would take. The types of opinions in List A and the report modifications in List B may be selected once, more than once, or not at all. Assume: The auditor is independent. The auditor previously expressed an unmodified Only single-year (not comparative) statements are presented for the current year. The conditions for an unmodified opinion exist unless contradicted in the factual situations. The conditions stated in the factual situations are material. No report modifications are to be made except in response to the factual situation.

Items to be answered: 1. In auditing the long-term investments account, an auditor is unable to obtain audited financial statements for an investee located in a foreign country. The auditor concludes that sufficient appropriate audit evidence regarding this investment cannot be obtained. 2. Due to recurring operating losses and working capital deficiencies, an auditor has substantial doubt

financial statement disclosures concerning these matters are adequate. 3. A principal auditor decides to take responsibility for the work of another CPA who audited a wholly-owned subsidiary of the entity and issued an unmodified opinion. The total assets and revenues of the subsidiary represent 17% and 18%, respectively, of the total assets and revenues of the entity being audited. 4. An entity issues financial statements that present financial position and results of operations but omits the related statement of cash flows. Management discloses in the notes to the financial statements that it does not believe the statement of cash flows to be a useful financial statement. 5. An entity changes its inventory valuation method from FIFO to LIFO. The auditor concurs with the

ial statements. 6. An entity is a defendant in a lawsuit alleging infringement of certain patent rights. However, the ultimate outcome of the litigation cannot be reasonably estimated by management. The auditor believes there is a reasonable possibility of a significantly material loss, but the lawsuit is adequately disclosed in the notes to the financial statements. 7. An entity discloses in the notes to the financial statements certain lease obligations. The auditor believes that the failure to capitalize these leases is a departure from generally accepted accounting principles.

The Uniform CPA Examination

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List A List B

Types of Opinions Report Modifications

A An "except for" qualified opinion

B An unmodified opinion C An adverse opinion D A disclaimer of opinion E Either an "except for" qualified

opinion or an adverse opinion F Either a disclaimer of opinion

opinion G Either an adverse opinion or a

disclaimer of opinion

H Describe the circumstances in an explanatory paragraph preceding the opinion paragraph without modifying the opinion paragraph.

I Describe the circumstances in an emphasis-of-

matter paragraph following the opinion paragraph without modifying the other paragraphs.

J Describe the circumstances in an other-matter

paragraph following the opinion paragraph without modifying the other paragraphs.

K Describe the circumstances in a basis-for-

modification paragraph preceding the opinion paragraph and modify the opinion paragraph.

L Describe the circumstances in an emphasis-of-

matter paragraph following the opinion paragraph and modify the opinion paragraph.

M Describe the circumstances in a basis-for-

modification paragraph preceding the opinion paragraph and modify the introductory and opinion paragraphs.

N Describe the circumstances in an emphasis-of-

matter paragraph following the opinion paragraph and modify the introductory and opinion paragraphs.

O Describe the circumstances within the introductory

paragraph without adding any additional paragraphs.

P Describe the circumstances within the opinion

paragraph without adding any additional paragraphs.

Q Describe the circumstances within the introductory

and opinion paragraphs without adding any additional paragraphs.

R

modification.



CLASS Task-Based Simulation 2

Research

Authoritative Literature Help

Arnold Co. changed its method of accounting for inventories from FIFO to the weighted average method. Billups, CPA, concurs with the change and has noted that it has been properly accounted for and is adequately disclosed in the financial statements. Billups is curious as to whether or not the report on the audited financial statements should be modified.

1. Which title of Professional Standards addresses this issue & will be helpful in

circumstances? 2. Enter the exact section and paragraph with helpful information.


Roger CPA Review -41

CLASS SOLUTIONS: 1. (c) In the Auditors responsibility paragraph, it mentions that and auditor evaluates the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management. The requirement is to identify the statement that is included

states that an audit includes assessing significant estimates made by management; the other replies provide information not directly mentioned in a standard report. 2. (c) The basic unmodified audit report for a nonissuer consists of 4 paragraphs. The

he opinion paragraph. Reference to the auditing standards used is made in the Auditors responsibility paragraph and reference to accordance with the principles is made in the opinion paragraph. 3. (c ifically mentioned that the auditor

financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion, and accordingly, we express no such opinion. 4. (a) When an uncertainty exists relating to a going concern doubt, an emphasis of a matter paragraph is added following the opinion paragraph. It refers to the Note in the financial s 5. (c) Whenever there is a change in accounting principles, including a change in the method of accounting for inventories, a change from an unacceptable principle to an acceptable one, or a change that management cannot reasonably justify, the auditor's report will include some reference to consistency. A change in the useful life of an asset is a change in accounting estimate that does not affect consistency. 6. (b) The inability of an auditor to determine the amounts associated with employee fraud, the client refusing to permit the auditor to confirm certain accounts receivable or apply alternative procedures, and the unwillingness of the chief executive officer to sign a management representation letter all represent scope limitations. Depending on the materiality, a disclaimer of opinion may be issued. Management's not providing reasonable assurance for a change in accounting principles represents a potential nonconformity with GAAP. The auditor may issue a qualified or adverse opinion, but would not issue a disclaimer. 7. (b) If a client has not appropriately accounted for a material illegal act, the auditor's report must reflect this departure from GAAP by issuing a qualified or adverse report. It would not be appropriate to issue a disclaimer because the auditor issues disclaimer of opinions to reflect very material departures from Generally accepted auditing standards, not GAAP. It would also not be appropriate to issue an unmodified opinion because the nature of the illegal act is material. 8. (d) Under a PCAOB audit for an issuer, in a qualified report due to inadequate disclosure (disagreement), the auditor issues a standard introductory paragraph and would not modify the scope because inadequate disclosure is a departure from GAAP, not GAAS. The auditor would however modify the opinion paragraph to an "except for ", qualified opinion.



9. (b) If Park is unable to obtain satisfaction as to the opening balances of inventory, the value of cost of goods sold cannot be verified and would result in a qualified or disclaimer of opinion on the income statement. Since Park was able to audit the ending balance in inventory, there is no scope limitation and an unmodified opinion may be issued on the balance sheet. 10. (b) When an auditor is auditing Group financial statements (division of responsibility) and the Group auditor decides to share responsibility with the component auditor, then the dollar amount or percent audited by the other auditor is included in the auditors responsibility

audit and the report of 11. (d) Preventing the auditor from reviewing the working papers of the predecessor auditor, engaging the auditor after completion of the year-end physical inventory, and requesting that material accounts receivable not be confirmed are all scope limitations that could preclude an unqualified opinion. The auditor, however, may be able to overcome these limitations by

presentation of the financial statements in conformity with GAAP is a limitation for which there are no alternate procedures and would always preclude issuance of an unmodified opinion. 12. (b) Whenever a qualified, adverse or disclaimer of opinion report is issued, the reasons for

paragraph.



CLASS Task-Based Simulation 1 Solutions Audit Opinion Authoritative Literature Help

1. FK The inability to obtain sufficient appropriate audit evidence is a scope limitation. We know that long-term investments is material. We do not, however, know if it is so material that a material misstatement would also result in a material misstatement to the financial statements taken as a whole. As a minimum, we will issue a qualified opinion since we cannot express an opinion about an item that is material to the financial statements. If it is pervasive, however, we would not be able to express an opinion on the financial statements taken as a whole and would issue a disclaimer. Either of these represents a modification of the opinion paragraph which would be preceded by a paragraph entitled either basis for qualification or basis for disclaimer of opinion, as appropriate.

2. BI As long as an entity properly discloses a substantial doubt about its ability to continue as a going concern, the auditor will issue a report with an unmodified opinion. Due to the significance of a going concern doubt, however, the auditor is required to draw attention to it. This will be done by including an emphasis-of-matter paragraph, which always immediately follows the opinion paragraph.

3. BR When an auditor decides to take responsibility for the work of another auditor, there should be no indication in the audit report that any portion of the financial statements was audited by another auditor. Neither the opinion nor any of the other paragraphs are modified since the auditor was able to obtain sufficient appropriate audit evidence and there were apparently no material misstatements.

4. AM The omission of the statement of cash flows is a violation of GAAP and would result in a

to be materially misstated and, as a result, an adverse opinion would not be appropriate. Since the introductory paragraph names that financial statements that are being audited, it will have to be modified to omit mention of the statement of cash flows. A basis for modification paragraph is required for any modified opinion, which would be before the opinion paragraph. In addition, the opinion paragraph is modified to indicate the qualification and to eliminate the reference to cash flows.

5. BI A user assumes financial statements were prepared in a manner consistent with the previous year unless the auditor report indicates otherwise. Since the auditor concurs with the change in accounting principles and since there is no indication that it was not accounted for and disclosed properly, there is no basis for a modified opinion. The auditor will alert users to the inconsistency with an emphasis-of-matter paragraph, which always immediately follows the opinion paragraph.

6. BI When the entity has a loss contingency that is reasonably possible, it is required to be disclosed but not accrued. If it is adequately disclosed, there is no basis for modifying the

auditor will likely wish to bring it to the attention of users of the financial statements, which will be done by adding an emphasis-of-matter paragraph immediately following the opinion paragraph.

7. EK If the auditor believes there is a violation of GAAP that the client refuses to correct, the auditor will issue a qualified opinion if the matter is material to the financial statements but is not so material as to cause the financial statements taken as a whole to be materially misstated. If it is so material as to affect the fairness of the financial statements taken as a whole, an adverse opinion would be required. In either case, the opinion paragraph would be modified and a basis-for-modification paragraph will be added immediately before the opinion paragraph.



CLASS Task-Based Simulation 2 Solutions

Research

Authoritative Literature Help

AU-C 708 .08



Other Services and Reports (Lecture 9.02) Special Reports An accountant may be asked to prepare a special report in certain engagements, including:

Reporting on financial statements that are prepared in conformity with some special purpose framework, often referred to as an other comprehensive basis of accounting (OCBOA) other than GAAP.

Reporting on specified elements, accounts, or items on a financial statement. Completing prescribed forms of a government agency on behalf of the client. Reporting on the client's compliance with contracts or government requirements.

1. Audits of Financial Statements Prepared in Accordance With Special Purpose Frameworks (AU-C 800)

OCBOA statements are often designed to conform to an income tax basis or a basis used by a regulatory agency (restricted use), or may use the cash receipts and disbursements method. There must be a definite set of criteria that would enable the auditor to determine conformity with the approach. It is not considered a special report when an auditor examines financial statements that are intended to conform to GAAP but which contain material misstatements causing a qualified or adverse opinion.

Prescribed forms of government agencies often require special handling, because they may include specific representations that the accountant is expected to make.

Third parties dealing with the client may request reports on compliance with agreements related to the financial statements. For example, a creditor may wish the auditor to provide a report on whether the client's working capital ratio has been maintained through the year at the level required in connection with a loan agreement.

When an auditor accepts an engagement to examine financial statements that are intended to conform to a comprehensive basis of accounting other than GAAP, the audit will still conform to generally accepted auditing standards (GAAS), and the opinion may still be unqualified, qualified, or adverse, depending on whether the statements conform to the OCBOA. An explanatory paragraph must be added before the opinion, identifying the basis used, indicating it is different from GAAP, and referring to a note in which the client discusses the basis. A sample report following an audit of financial statements designed to conform to the cash receipts and disbursements method follows:



Special Purpose Framework Report (OCBOA)

Independent Auditor's Report (OCBOA)

To the Board of Directors of X Company:

Report on the Financial Statements (Introductory) We have Audited the accompanying financial statements of X Co, which comprise the statement of assets and liabilities arising from cash transactions as of December 31, 20X1, and the related statement of revenue collected and expenses paid for the year then ended, and the related notes to the financial statements.

Management is responsible for the preparation and fair presentation of these financial statements in accordance with the cash basis of accounting described in Note X; this includes determining that the cash basis of accounting is an acceptable basis for the preparation of the financial statements in the circumstances. Management is also responsible for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Our responsibility is to express an opinion on these financial statements base on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain evidence about the amounts and disclosures in

assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the

procedures that are appropriate in the circumstances, but not for the purpose of expressing an

opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the assets and liabilities arising from cash transactions of X Company as of December 31, 20X1, and the revenue collected and expenses paid for the year then ended, in accordance with the cash basis of accounting described in Note X.

Basis of Accounting We draw attention to Note X of the financial statements, which describes the basis of accounting. The financial statements are prepared on the cash basis of accounting, which is a basis of accounting other than accounting principles generally accepted in the United States of America. Our opinion is not modified with respect to this matter. L.F. Rosenthal, CPA Auditors city & state March 1, 20X2



Notice that the statements must be suitably titled to distinguish the basis used from GAAP. If the client fails to do so, this is considered inadequate disclosure and will require the auditor to express a qualified opinion.

An accountant may be asked to compile or review OCBOA statements of a non-public entity. The accountant will apply to SSARS to such an engagement, as discussed earlier. A failure of the client to suitably title these statements will require the accountant to modify the report in order to identify the basis used. 2. Specified Elements, Accounts or Items of a Financial Statement

(AU-C 805) An auditor may accept an engagement to examine or compile specified elements, accounts, or items of a financial statement as long as the client imposes no restriction on the scope of the auditor's procedures. This may be either a separate engagement or one performed in conjunction with an audit of the financial statements of the client.

Audits of specified elements, accounts, or items are sometimes needed to satisfy a creditor, landlord, or employee about the calculations related to certain agreements. A landlord might want an opinion on the calculation of rent expense under a percentage agreement, or an officer might want verification of a profit-sharing calculation related to net income. Also, a CPA is sometimes asked for an opinion on the application of GAAP to a specific transaction when the client of another CPA firm disagrees with that firm about the appropriate treatment.

The opinion on the specified element may be expressed in a report that also issues an opinion on the financial statements, as long as the opinion is either unmodified or qualified. If, however, the auditor has either issued an adverse opinion or a disclaimer of opinion on the financial statements, the report on the specified element must be presented in a separate report, since the combination of an opinion on the element and disclaimer or adverse opinion on the statements that contain the element would be confusing to the reader of the report (the prohibited approach is sometimes called a "piecemeal" opinion).

If an accountant is asked to give an opinion on the application of GAAP to a specific transaction by a client of another CPA firm, the accountant must consult with the other CPA firm on the transaction in question. If the accountant is being asked for this opinion as part of a proposal to become the new auditor of the client, the report must specifically indicate that the conclusion might change if there is a change in facts, circumstances, or assumptions behind the report. This is needed to prevent a client from being able to "shop around" for accounting principles.

SSARS expanded the SSARSs to apply when the CPA is engaged to compile, or issues a compilation report on financial statement elements, accounts, or items.

Written By:

Roger Philipp, CPA Roger CPA Review 2261 Market St. #333 San Francisco, California 94114 www.RogerCPAreview.com (877) ROG-4CPA (415) 346-4272



STUDY QUESTIONS:

1. A group auditor decides not to refer to the audit of another CPA who audited a

professional reputation and independence, the group auditor most likely would

a. Document in the engagement letter that the principal auditor assumes no

b. Obtain written permission from the other CPA to omit the reference in the

c. Contact the other CPA and review the audit programs and working papers pertaining to the subsidiary.

d. not material to the consolidated financial

statements.

2. In which of the following paragraphs of an auditor's report does an auditor communicate the nature of the engagement and the specific financial statements covered by the audit?

a. b. Opinion paragraph. c. Introductory paragraph. d. Emphasis of matter paragraph.

3. In which of the following should an auditor's report refer to the lack of consistency when

there is a change in accounting principle that was properly accounted for and disclosed that is significant?

a. The b. The opinion paragraph. c. An additional paragraph following the opinion paragraph. d. An additional paragraph before the opinion paragraph.

4. A client has capitalizable leases but refuses to capitalize them in the financial

statements. Which of the following reporting options does an auditor have if the amounts pervasively distort the financial statements?

a. Qualified opinion. b. Unmodified opinion. c. Disclaimer opinion. d. Adverse opinion.

5. Zag Co. issues financial statements that present financial position and results of

operations but Zag omits the related statement of cash flows. Zag would like to engage Brown, CPA, to audit its financial statements without the statement of cash flows although Brown's access to all of the information underlying the basic financial statements will not be limited. Under these circumstances, Brown most likely would

a. Add an explanatory paragraph to the standard auditor's report that justifies the reason for the omission.

b. Refuse to accept the engagement as proposed because of the client-imposed scope limitation.

c. Explain to Zag that the omission requires a qualification of the auditor's opinion.



d. Prepare the statement of cash flows as an accommodation to Zag and express an unmodified opinion.

6. An auditor who is unable to form an opinion on a new client's opening inventory

balances may issue an unmodified opinion on the current year's

a. Income statement only. b. Statement of cash flows only. c. Balance sheet only. d. Statement of shareholders' equity only.

7. After an audit report is issued, an auditor discovers that an important audit procedure

was not performed. Which of the following procedures is acceptable in this situation?

a. No further action is necessary if the audit report can still be supported. b. Let the current report stand and correct material errors on the next audit report. c. Immediately notify known users of the omitted audit procedure. d. Require that the client notify financial statements users of the omitted

procedures.

8. Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of subsequent events?

a. Determine whether inventory ordered before the year end was included in the physical count.

b. Inquire about payroll checks that were recorded before year end but cashed after year end.

c. Investigate changes in capital stock recorded after year end. d. Review tax returns prepared by management after year end.

9. How does an auditor make the following representations when issuing the standard

auditor's report on comparative financial statements? Consistent Evaluate the application of overall presentation accounting principles of the financial statements

a. Implicitly Explicitly b. Explicitly Implicitly c. Implicitly Implicitly d. Explicitly Explicitly

10. After issuing an auditor's report, an auditor becomes aware of facts that existed at the

report date that would have affected the report had the auditor known of the facts at the time. What is the first thing the auditor should do?

a. Notify each member of the board of directors that the auditor's report may not be associated with the financial statements from this point forward.

b. Issue revised financial statements and auditor's report describing the reason for the revision in a note to the financial statements.

c. Determine whether there are persons currently relying on, or likely to rely on, the financial statements and whether those persons would attach importance to the information.

d. Notify regulatory agencies having jurisdiction over the client that the auditor's report should not be relied upon from this point forward.



11. An auditor concludes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. The entity's financial statements adequately disclose its financial difficulties. Under these circumstances, the auditor's report is required to include an emphasis of matter paragraph that specifically uses the phrase(s) of t

a. Yes Yes b. Yes No c. No Yes d. No No

12. 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

a. Issue an updated comparative audit report indicating the division of responsibility.

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 year's statements.

d. Indicate the substantive reasons for the qualification in the predecessor auditor's opinion.

13. An auditor may report on summary financial statements that are derived from a complete set of audited financial statements only if the auditor

a. Has not expressed an adverse opinion or issued a disclaimer of opinion on the audited financial statements from which the condensed financial statements are derived.

b. Indicates whether the information is fairly stated in all material respects in relation to the complete financial statements.

c. Determines that the summary financial statements include all the disclosures necessary for the complete set of financial statements.

d. Presents the summary financial statements in comparative form with the prior-year's summary financial statements.

14. An auditor should be aware of subsequent events that provide evidence concerning conditions that did not exist at year end but arose after year end. These events may be important to the auditor because they may

a. Require adjustments to the financial statements as of the year end. b. Have been recorded based on preliminary accounting estimates. c. Require disclosure to keep the financial statements from being misleading. d. Have been recorded based on year-end tests for asset obsolescence.



15. During the audit of a new client, the auditor determined that management had given illegal bribes to municipal officials during the year under audit and for several prior years. The auditor notified the client's board of directors, but the board decided to take no action because the amounts involved were immaterial to the financial statements. Under these circumstances, the auditor should

a. Add an explanatory paragraph emphasizing that certain matters, while not affecting the unmodified opinion, require disclosure.

b. Report the illegal bribes to the municipal official at least one level above those persons who received the bribes.

c. Consider withdrawing from the audit engagement and disassociating from future relationships with the client.

d. qualified opinion or an adverse opinion with a separate paragraph that explains the circumstances.

16. When qualifying an opinion because of an insufficiency of audit evidence, an auditor should refer to the situation in the responsibility Notes to the paragraph financial statements

a. Yes Yes b. Yes No c. No Yes d. No No

17. After issuing an auditor's report, an auditor has no obligation to make continuing

inquiries concerning audited financial statements unless

a. Information about a material transaction that occurred just after the auditor's report was issued is deemed to be reliable.

b. A final resolution is made of a contingent liability that had been disclosed in the financial statements.

c. Information that existed at the report date and may affect the report comes to the auditor's attention.

d. An event occurs just after the auditor's report was issued that affects the entity's ability to continue as a going concern.

18. An auditor who uses the work of a specialist may refer to the specialist in the auditor's report if the

a. Auditor believes that the specialist's findings are reasonable in the circumstances.

b. Specialist's findings support the related assertions in the financial statements. c. Auditor modifies the report because of the difference between the client's and

the specialist's valuations of an asset. d. Specialist's findings provide the auditor with greater assurance of reliability

about management's representations.



19. Under which of the following circumstances would the expression of a disclaimer of opinion be inappropriate?

a. The auditor is unable to obtain the audited financial statements of a consolidated investee.

b. Management does not provide reasonable justification for a change in accounting principles.

c. The company failed to make a count of its physical inventory during the year and the auditor was unable to apply alternative procedures to verify inventory quantities.

d. Management refuses to allow thcanceled checks and bank statements.

20. On March 1, Green, CPA, expressed an unmodified opinion on the financial statements of Ajax Co. On July 1, Green's internal inspection program discovered that engagement personnel failed to observe Ajax's physical inventory. Green believes that this omission impairs Green's ability to support the unmodified opinion. If Ajax's creditors are currently relying on Green's opinion, Green should first

a. Request Ajax's management to communicate to its creditors that Green's opinion should not be relied on.

b. Reissue Green's auditor's report with an explanatory paragraph describing the departure from GAAS.

c. Undertake to apply the alternative procedures that would provide a satisfactory basis for Green's opinion.

d. Advise Ajax's board of directors to disclose this development in its next interim report.

21. Which of the following procedures would an auditor most likely perform in obtaining evidence about subsequent events?

a. Examine changes in the quoted market prices of investments purchased since the year end.

b. Compare the latest available interim financial information with the financial statements being reported upon.

c. Apply analytical procedures to the details of the balance sheet accounts that were tested at interim dates.

d. Inquire about payroll checks that were recorded before the year end but cashed after the year end.

22. Which of the following items would most likely require an adjustment to the financial statements for the year ended December 31, year 1?

a. Uninsured loss of inventories purchased in year 1 as a result of a flood in year 2.

b. Settlement of litigation in year 2 over an event that occurred in year 2. c. Loss on an uncollectible trade receivable recorded in year 1 from a customer

that declared bankruptcy in year 2. d. Proceeds from a capital stock issuance in year 2 which was being approved by

the board of directors in year 1.



23. In using the work of a specialist, an auditor may refer to the specialist in the auditor's report if, as a result of the specialist's findings, the auditor

a. Desires to disclose the specialist's findings, which imply that a more thorough audit was performed.

b. Makes suggestions to management that are likely to improve the entity's internal control.

c. Corroborates another specialist's findings that were consistent with management's assertions.

d. Adds an emphasis-of-matter paragraph to the auditor's report to emphasize an unusually important subsequent event.

24. A client decides not to make an auditor's proposed adjustments that collectively are not material and wants the auditor to issue the report based on the unadjusted numbers. Which of the following statements is correct regarding the financial statement presentation?

a. The financial statements are free from material misstatement, and no disclosure is required in the notes to the financial statements.

b. The financial statements do not conform with generally accepted accounting principles (GAAP).

c. The financial statements contain unadjusted misstatements that should result in a qualified opinion.

d. The financial statements are free from material misstatement, but disclosure of the proposed adjustments is required in the notes to the financial statements.

25. A CPA concludes that the unaudited financial statements on which the CPA is

disclaiming an opinion are not in conformity with generally accepted accounting principles (GAAP) because management has failed to capitalize leases. The CPA suggests appropriate revisions to the financial statements, but management refuses to accept the CPA's suggestions. Under these circumstances, the CPA ordinarily would

a. Express limited assurance that no other material modifications should be made to the financial statements.

b. Restrict the distribution of the CPA's report to management and the entity's board of directors.

c. Issue a qualified opinion or adverse opinion depending on the materiality of the departure from GAAP.

d. Describe the nature of the departure from GAAP in the CPA's report and state the effects on the financial statements, if practicable.

26. Under which of the following circumstances would an auditor's expression of an unmodified opinion be inappropriate?

a. The auditor is unable to obtain the audited financial statements of a significant subsidiary.

b. The financial statements are prepared on the entity's income tax basis. c. There are significant deficiencies in the design and operation of the entity's

internal control. d. Analytical procedures indicate that many year-end account balances are

not comparable with the prior year's balances.



27. A CPA's standard report on audited financial statements would be inappropriate if it referred to

a. Management's responsibility for the financial statements. b. An assessment of the entity's accounting principles. c. Significant estimates made by management. d. The CPA's assessment of sampling risk factors.

28. When an auditor 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.

29. On February 9, Brown, CPA, expressed an unmodified opinion on the financial statements of Web Co. On October 9, during a peer review of Brown's practice, the reviewer informed Brown that engagement personnel failed to perform a search for subsequent events for the Web engagement. Brown should first

a. Request Web's permission to perform substantive procedures that would provide a satisfactory basis for the opinion. b. Inquire of Web whether there are persons currently relying, or likely to rely, on the financial statements. c. Take no additional action because subsequent events have no effect on the financial statements that were reported on. d. Assess the importance of the omitted procedures to Brown's present ability to support the opinion.

30. Which of the following events occurring after the issuance of an auditor's report most likely would cause the auditor to make further inquiries about the previously issued financial statements?

a. A lawsuit is resolved that is explained in a separate paragraph of the prior- year's auditor's report. b. New information is discovered concerning undisclosed related party transactions of the prior year. c. A technological development occurs that affects the entity's ability to continue as a going concern. d. The entity sells a subsidiary that accounts for 35% of the entity's consolidated sales.



STUDY QUESTION SOLUTIONS:

1.(c) An auditor of an entity that has subsidiaries or other components that will be audited by component auditors will make a decision as to whether or not to take responsibility for the work of component auditors after contacting them and evaluating their work (c). The decision is made after an understanding is established with the client and would not be included in the engagement letter (a). Permission would be required to make reference

are not material would only be appropriate if that were true, not because they were audited by a component auditor (d).

2.(c) The introductory paragraph of the audit report identifies the financial statements that

paragraph indicates that the auditor is required to comply with GAAS and indicates what

to the financial statements (b). An emphasis of matter paragraph is used to draw attention to something properly accounted for and disclosed in the financial statements (d).

3.(c) When financial statements have not been prepared consistently due to a change in accounting principles that has been properly accounted for and disclosed does not require a modified opinion. The introductory paragraph, management responsibility

standard paragraphs. The auditor will, however, add an emphasis of matter paragraph following the opinion paragraph. If the change had not been properly accounted for or disclosed, the auditor would modify the report, affecting the opinion paragraph (b), and would add a paragraph with the basis for the qualification before the opinion paragraph (d). The aud

4.(d) When a departure from the applicable financial reporting framework is significant enough to affect the financial statements taken as a whole, the auditor would conclude that the financial statements are not fairly presented and would issue an adverse opinion. A qualified opinion (a) would be appropriate if the departure was material but not pervasive such that it resulted in a material misstatement, but did not affect the fairness of the financial statements taken as a whole. An unmodified opinion (b) would only be appropriate if there were no departure or if it was not material, and a disclaimer of opinion (c) would only be appropriate if the auditor was not able to obtain sufficient appropriate audit evidence to formulate an opinion.

5.(c) An omission of the statement of cash flows is a departure from GAAP and would require the auditor to issue a qualified opinion, it is not a scope limitation (b). An explanatory paragraph, providing the basis for the qualification, would be added before the opinion paragraph, but it would explain the departure, not justify it (a). The auditor may be asked by the client to prepare the statement of cash flows, but would not do so unless engaged by the client to do so (d).

6.(c) The inability of an auditor to form an opinion on beginning inventory does not affect the ability to form one on ending inventory, enabling the auditor to express an opinion on the ending balance sheet. Since beginning inventory is a component of cost of sales, the auditor would not be able to form an opinion on the income statement (a) or the

in inventory is taken into account in calculating cash flows from operating activities and the inability to form an opinion on beginning inventory would prevent forming one on cash flows (b).



7.(a) When an auditor determines after the issuance of the audit report that a necessary procedure had not been performed, the auditor will first determine if the performance of that procedure would have resulted in a change to the report issued. If not, the auditor will conclude that the report issued can still be relied upon and will take no further action. If it would have affected the report, the auditor will evaluate the next course of action, which may involve requesting the client to correct the previously issued financial statements, notifying known users to no longer rely on the report, although they would not be notified of the omitted procedures by either the auditor (c) or the client (d). It

statements are issued (b).

8.(c) Subsequent events are transactions that occur after the end of the period, which are analyzed by the auditor to determine if they require adjustment of the financial statements being issued. Inventory ordered before the year-end is not a subsequent event but a historical one (a) as would be the case with payroll checks written before year-end (b). Although tax returns are prepared after year-end, they reflect transactions that occurred during the period, not subsequent to it (d).

9.(a) sponsibility paragraph that an audit includes evaluating the overall presentation of the financial statements. Consistency, on the other hand, is only mentioned when there is an exception. When there is no material inconsistency, consistency is implied by the fact that it is not mentioned in the standard report.

10.(c) When, after issuance of the audit report, the auditor becomes aware of facts that would have affected the report if they had been known at the time, the auditor will first try to determine if the financial statements are still being relied upon and if users would be affected by the information. If not, no further action need be taken. The auditor will discuss the matter with management and, if appropriate, governance, but not necessarily with each member of the board of directors (a). They will determine if management, not the auditor, should revise the financial statements (b). The auditor may encourage the client to notify regulatory agencies not to rely on the financial statements but would not consider taking such action unless the client refuses to do so (d).

11.(d) When the auditor concludes that there is substantial doubt that an entity will be able to continue as a going concern, the auditor will make certain that it is properly accounted for and disclosed in the financial statements. If it is, the auditor will provide an unmodified report with an emphasis of matter paragraph, following the opinion paragraph, drawing attention to the disclosure of the going concern issue. The auditor w

12.(dwith prior period financial statements audited by another auditor, the audit report will include an opinion on the current period financial statements and indicate that the prior

-matter paragraph following the opinion. The report will indicate the nature of the predecessor

division of responsibility (a) as would be the case if it were a group audit. Comparative statements may be presented in these circumstances (b), but it would not be appropriate



13.(a) If engaged to report on summary financial statements, the auditor should withdraw from the engagement if the report on the audited financial statements contain an adverse opinion or a disclaimer of opinion. The report on summary information will indicate that it is consistent with the audited financial statements, not that it is fairly stated (b). Summary financial statements will either be in a document that contains the audited financial statements or will indicate their ability. As a result, they are not required or expected to have all of the disclosures required for a complete set of financial statements (c). Summary financial statements may be presented individually or in comparative form (d).

14.(c) If, as a result of an event occurring after the date of the financial statements, assets on the balance sheet were subjected to a dramatic decline in value, GAAP requires that this be disclosed so that the users of the financial statements are not mislead by the amount at which the asset is properly reported as of the balance sheet date. Only subsequent events providing evidence of conditions that did exist at the financial statement date will result in adjustment (a), and contingencies, not subsequent events, may be recorded on the basis of preliminary accounting estimates (b). Year-end tests for asset obsolescence (d) relate to conditions that existed at the financial statement date, not subsequent to it.

15.(c) If amounts involved are immaterial, the illegal bribes do not affect the reliability of the financial statements and would not require an explanatory paragraph (a), or a qualified opinion (d). The auditor would not report the bribe to officials, although the auditor may consult an attorney as to the best course of action (b). The fact that the board of directors decided to take no action, however, raises a question as to the integrity of management and governance and should cause the auditor to consider withdrawal from the engagement.

16.(d) When an auditor qualifies an opinion due to a scope limitation, indicating that the auditor was not able to obtain sufficient appropriate audit evidence as to something that was material to the financial statements, the audit report will include the standard

s responsibilities, and

the qualification would be added, preceding the opinion paragraph, and the opinion paragraph would be modified to indicate the qualification and refer to the preceding paragraph. The notes are the responsibility of management and are not modified by the auditor.

17.c) Historical financial statements are designed to provide the most reliable information possible on the basis of information available up through the report date, the date through which subsequent events are considered. The auditor has no obligation to notify users of events occurring after that date, even a material transaction (a), the settlement of a contingency (b), or a matter affgoing concern (d). The auditor is required to notify users of information that did exist at the report date if it would have affected the report.

18.(c) When an auditor issues a modified report, the auditor will provide an explanatory paragraph to indicate the basis for the modification, which may be a conflict between the findings of a specialist and the client. If the report is not modified, as would be the case if the findings are reasonable (a), they support the assertions (b), and they provide greater reliance on the financial statements (d), no reference would be made.

19.(b) A disclaimer of opinion is appropriate when the auditor is unable to obtain sufficient appropriate audit evidence to be able to form an opinion on the financial statements. This would be the case if the auditor was unable to obtain audited financial statements



for a material consolidated subsidiary (a); the auditor was unable to obtain satisfaction as to the quantity or value of inventory, if material (c); or if management imposed a scope limitation, such as not allowing the auditor to review canceled checks (d).

indicates a departure from GAAP, which would require a qualified opinion, not a disclaimer.

20.(c) Upon learning that a necessary audit procedure was not performed, the auditor will

upon. This will be accomplished by performing alternate procedures to the extent possible. If the auditor determines that the report can be relied upon, no further action is required. If, however, the auditor determines that the report should not be relied upon, the next course of action, which may involve having the entity communicate to users that the report should not be relied upon (a), advising the client to disclose it in a subsequent report that may be imminent (d), or having the entity revise the financial statements. The auditor would not reissue the report with a paragraph explaining the departure (b).

21.(b) By comparing interim financial statements with those reported on, the auditor can identify any significant changes in financial position that would not be explained by normal operations, indicating the possibility of subsequent events that should evaluated. The auditor would not be concerned about securities purchased after year end (a) as their value would not affect the audited financial statements. Testing balance sheet accounts (c) would not provide information about subsequent events, nor would inquiries about paychecks recorded before year end (d) as neither relates to events occurring after year-end.

22.(c) When a customer declares bankruptcy, it may be an indication that it was insolvent as of the end of the period, in which case the receivable should have been written off. If bankruptcy is declared before the financial statements are issued, a determination will be made as to whether the receivable was collectible at year-end and, if not, an adjustment will be proposed to write it off. A flood occurring after year-end (a) is an event that is likely to require disclosure but it does not affect amounts as of the balance sheet date and would not require an adjustment. Settlement of litigation that had occurred in year 1 might require the adjustment of a contingent liability, but if the litigation did not occur until year 2 (b), it does not represent a contingent liability in year 1. The approval of a stock issuance may be disclosed in year 1, but it would not require adjustment until shares were actually issued (d).

23.(d) Regardless of whether an auditor uses the work of a specialist, the auditor is responsible for the audit and mentioning a specialist to imply a more thorough audit (a) would not be appropriate. If the work of a specialist provides information helpful in making suggestions about internal control to management (b) or corroborates another specidocumentation, not the report. The auditor may, however, use an emphasis-of-matter paragraph to bring unusual circumstances to the attention of users of the financial statementunderstandings.

24.(a) The auditor expresses the opinion that the financial statements are not materially misstated and, as a result, if adjustments that are not material are not made by the client, the auditor will still issue an unmodified report. Since the adjustments are not material, the auditor would not indicate that the financial statements do not comply with GAAP (b). The adjustments should only result in a qualified opinion if they are material and, since they are not, so indicating would not be appropriate (c). Footnotes only



provide information that is material to users, which would not include the immaterial adjustments that were not made by the entity (d).

25.(d) Although the auditor is issuing a disclaimer of opinion, when the auditor is aware of a

departure from GAAP, it should be appropriately disclosed in an other matter paragraph the

auditor was unable to obtain sufficient appropriate audit evidence to formulate an opinion, neither limited assurance (a), nor an adverse or qualified opinion (c) would be appropriate. A departure from GAAP is not an appropriate reason to restrict the distribution of a report (b).

26.(a) If the auditor is unable to obtain audited financial statements of a significant subsidiary, it is not likely that the auditor will be able to obtain sufficient appropriate audit

ces. Depending on materiality, a qualified or disclaimer of opinion would be appropriate. The auditor may issue an unmodified opinion on financial statements prepared using the tax basis of accounting (b), as long as the basis of accounting is adequately disclosed in the notes to the financial statements. Deficiencies in internal control (c) and circumstances where results of

timing, and extent of additional audit procedures but will not affect the opinion.

27.(dpreparation and fair presentation of the financial statements (a) in the paragraph

responsibilities, there is an indication that the auditor evaluates the accounting principles

sional judgment and would be documented in the

28.(b) The auditor is not required to issue a modified report when there are signs that an entity will not be able to continue as a going concern as long as the circumstances are appropriately accounted for and disclosed. Those indications may include an imminent

negative trends and recurring losses (d). A modified report would be required, however, if the circumstances are not adequately disclosed, which would be a departure from GAAP.

29.(dnecessary audit procedure, the first step the auditor will take will be to determine if the report can be supported by the amount of appropriate audit evidence obtained. If so, no further action is required. If not, the auditor may inquire as to whether there are parties relying on the financial statements (b) as the performance of the procedure may not be necessary. If there are, the auditor may perform the procedure (a) if practicable. The omission of a necessary procedure is not a subsequent event and taking no additional action would be inappropriate (d).

30.(b) Undisclosed related party transactions in the prior year represent a GAAP departure, which, depending on the materiality, might have resulted in a modified report. Upon learning of them, the auditor would investigate to determine if the report should be relied

estimate in the period of settlement and would not cause the auditor to make inquiries. going concern (c)

would require consideration in the period in which it occurs, but would not require the auditor to make inquiries regarding the prior period. The sale of a subsidiary after year-



end (d) would be disclosed if it occurred prior to the issuance of the financial statements but would not cause the auditor to make inquiries regarding the prior year if it occurred after issuance.

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