7) When there is uncertainty about a company’s ability to continue as a going concern, the
auditor’s concern is the possibility that the client may not be able to continue its operations or
meet its obligations for a “reasonable period of time.” For this purpose, a reasonable period of
time is considered not to exceed
A) six months from the date of the financial statements.
B) one year from the date of the financial statements.
C) six months from the date of the audit report.
D) one year from the date of the audit report.
8) When the auditor concludes that there is substantial doubt about the entity’s ability to continue
as a going concern, the appropriate audit report could be
I. an unmodified opinion audit report with an explanatory paragraph.
II. a disclaimer of opinion.
A) I only
B) II only
C) I or II
D) Neither I nor II
9) When a company’s financial statements contain a departure from GAAP with which the
auditor concurs, the departure should be explained in
A) the scope paragraph.
B) an introductory paragraph.
C) the opinion paragraph.
D) a separate paragraph.
10) William Gregory, CPA, is the principal auditor for an international corporation. Another
CPA has examined and reported on the financial statements of a significant subsidiary of the
corporation. Gregory is satisfied with the independence and professional reputation of the other
auditor, as well as the quality of the other auditor’s examination. With respect to his report on the
consolidated financial statements, taken as a whole, Gregory
A) must not refer to the examination of the other auditor.
B) must refer to the examination of the other auditor.
C) may refer to the examination of the other auditor.
D) must refer to the examination of the other auditors along with the percentage of consolidated
assets and revenue that they audited.
11) A company has changed its method of inventory valuation from an unacceptable one to one
in conformity with generally accepted accounting principles. The auditor’s report on the financial
statements of the year of the change should include
A) no reference to consistency.
B) a reference to a prior period adjustment in the opinion paragraph.
C) an explanatory paragraph that justifies the change and explains the impact of the change on
reported net income.
D) an explanatory paragraph explaining the change.
12) Which of the following modifications of the auditor’s report does not include an explanatory
paragraph?
A) A qualified report is due to a GAAP departure.
B) The report includes an emphasis of a matter.
C) There is a very material scope limitation.
D) A principal auditor accepts the work of an other auditor.
13) No reference is made in the auditor’s report to other auditors who perform a portion of the
audit when
I. The other auditor audited an immaterial portion of the audit.
II. The other auditor is well known or closely supervised by the principle auditor.
III. The principle auditor has thoroughly reviewed the work of the other auditor.
A) I and II
B) I and III
C) II and III
D) I, II and III
14) When an auditor is trying to determine how changes can affect consistency and and/or
comparability, he should keep in mind that
A) changes that affect comparability but not consistency require an explanatory paragraph.
B) items that materially affect the comparability of financial statements requires a disclaimer of
opinion.
C) changes that affect consistency require an explanatory paragraph if they are material.
D) changes that involve either comparability or consistency only need to be mentioned in the
footnotes.
15) All of the following would require an emphasis of matter paragraph except for
A) the existence of material related party transactions.
B) the lack of auditor independence.
C) important events occurring subsequent to the balance sheet date.
D) material uncertainties disclosed in the footnotes.
16) Under AICPA auditing standards, the primary auditor issuing the opinion on the financial
statements is called the
A) component auditor.
B) principal auditor.
C) group engagement partner.
D) majority auditor.
17) Which of the following is false concerning the principal CPA firm’s alternatives when
issuing a report when another CPA firm performs part of the audit?
A) Issue a joint report signed by both CPA firms.
B) Make no reference to the other CPA firm in the audit report, and issue the standard
unqualified opinion.
C) Make reference to the other auditor in the report by using modified wording (a shared opinion
or report).
D) A qualified opinion or disclaimer, depending on materiality, is required if the principal
auditor is not willing to assume any responsibility for the work of the other auditor.
18) Which of the following requires recognition in the auditor’s opinion as to consistency?
A) The correction of an error in the prior year’s financial statements resulting from a
mathematical mistake in capitalizing interest.
B) A change in the estimate of provisions for warranty costs.
C) The change from the cost method to the equity method of accounting for investments in
common stock.
D) A change in depreciation method which has no effect on current year’s financial statements
but is certain to affect future years.
19) Indicate which changes would require an explanatory paragraph in the audit report.
A)
Correction of an error by changing from
an accounting principle that is not
generally acceptable to one that is
generally acceptable
Change from LIFO to FIFO
Yes
Yes
B)
Correction of an error by changing from
an accounting principle that is not
generally acceptable to one that is
generally acceptable
Change from LIFO to FIFO
No
No
C)
Correction of an error by changing from
an accounting principle that is not
generally acceptable to one that is
generally acceptable
Change from LIFO to FIFO
Yes
No
D)
Correction of an error by changing from
an accounting principle that is not
generally acceptable to one that is
generally acceptable
Change from LIFO to FIFO
No
Yes
20) Indicate which changes would require an explanatory paragraph in the audit report.
A)
Change in the estimated life
of an asset
Variation in the format of the
financial statements
Yes
Yes
B)
Change in the estimated life
of an asset
Variation in the format of the
financial statements
No
No
C)
Change in the estimated life
of an asset
Variation in the format of the
financial statements
Yes
No
D)
Change in the estimated life
of an asset
Variation in the format of the
financial statements
No
Yes
21) Indicate which changes would require an explanatory paragraph in the audit report.
A)
The CPA concludes there is
substantial doubt about the
entity’s ability to continue as
a going concern.
Change from FIFO to LIFO
Yes
Yes
B)
The CPA concludes there is
substantial doubt about the
entity’s ability to continue as
a going concern.
Change from FIFO to LIFO
No
No
C)
The CPA concludes there is
substantial doubt about the
entity’s ability to continue as
a going concern.
Change from FIFO to LIFO
Yes
No
D)
The CPA concludes there is
substantial doubt about the
entity’s ability to continue as
a going concern.
Change from FIFO to LIFO
No
Yes
22) Indicate which changes would require an explanatory paragraph in the audit report.
A)
Changes in reporting entities,
such as the inclusion of an
additional company in the
combined financial
statements
The CPA makes reference to
the work of another auditor
to indicate shared
responsibility in an
unqualified opinion.
Yes
Yes
B)
Changes in reporting entities,
such as the inclusion of an
additional company in the
combined financial
statements
The CPA makes reference to
the work of another auditor
to indicate shared
responsibility in an
unqualified opinion.
No
No
C)
Changes in reporting entities,
such as the inclusion of an
additional company in the
combined financial
statements
The CPA makes reference to
the work of another auditor
to indicate shared
responsibility in an
unqualified opinion.
Yes
No
D)
Changes in reporting entities,
such as the inclusion of an
additional company in the
combined financial
statements
The CPA makes reference to
the work of another auditor
to indicate shared
responsibility in an
unqualified opinion.
No
Yes
23) When there is a lack of consistent application in accounting principles
A) the nature and impact of the change should be adequately disclosed.
B) the auditor should discuss the nature of the change and point the reader to the footnote that
discusses the change.
C) the materiality of the change is evaluated based on the current year effect of the change.
D) all of the above.
24) Discuss each of the five circumstances when an auditor would issue an unmodified opinion
audit report with an emphasis-of-matter paragraph or nonstandard report wording.
25) An unmodified opinion audit report with an emphasis-of-matter paragraph is issued when the
auditor believes the financials are fairly stated but also believes additional information should be
provided.
26) Changes in accounting estimates requires the auditor to issue a modified audit report with a
consistency paragraph inserted after the opinion paragraph.
27) The only unmodified opinion audit report that does not include an explanatory paragraph is
when other auditors are involved. In this case only the introductory paragraph is modified.
28) Items that materially affect the comparability of the financial statements generally require
disclosure in the footnotes.
29) Changes in an estimate, such as a change in the estimated useful life of an asset for
depreciation purposes, affect consistency but not comparability, and therefore require an
explanatory paragraph in the audit report.
30) Changes in reporting entities, such as the inclusion of an additional company in combined
financial statements, affect comparability but not consistency, and therefore do not require an
explanatory paragraph in the audit report.
31) When an auditor relies upon a different CPA firm to perform part of the audit and chooses to
issue a shared opinion, only the auditor’s responsibility paragraph should be modified.
32) When other auditors are involved in the audit and they qualify their portion of the audit, the
principal auditor must decide if the amount in question is material to the financial statements as a
whole.
33) The unmodified opinion audit report with emphasis-of-matter paragraph does not meet the
criteria of a complete audit with satisfactory results.
34) When there is a lack of consistent application of GAAP due to a new accounting
pronouncement, no explanatory paragraph is required.
3.5 Learning Objective 3-5
1) As a result of management’s refusal to permit the auditor to physically examine inventory, the
auditor must depart from the unmodified opinion audit report because
A) the financial statements have not been prepared in accordance with GAAP.
B) the scope of the audit has been restricted by circumstances beyond either the client’s or
auditor’s control.
C) the financial statements have not been audited in accordance with GAAS.
D) the scope of the audit has been restricted.
2) An adverse opinion is issued when the auditor believes
A) some parts of the financial statements are materially misstated or misleading.
B) the financial statements would be found to be materially misstated if an investigation were
performed.
C) the auditor is not independent.
D) the overall financial statements are so materially misstated that they do not present fairly the
financial position or results of operations and cash flows in conformity with GAAP.
3) An auditor can express a qualified opinion due to a
A)
Departure from
GAAP
Lack of Consistency
Lack of Sufficient
Evidence
Yes
No
No
B)
Departure from
GAAP
Lack of Consistency
Lack of Sufficient
Evidence
No
Yes
No
C)
Departure from
GAAP
Lack of Consistency
Lack of Sufficient
Evidence
Yes
No
Yes
D)
Departure from
GAAP
Lack of Consistency
Lack of Sufficient
Evidence
Yes
Yes
Yes
4) An auditor determines the financial statements include at least a material departure from
GAAP. Which type of opinion may be issued?
A)
Disclaimer
Qualified
Adverse
Yes
No
No
B)
Disclaimer
Qualified
Adverse
No
Yes
No
C)
Disclaimer
Qualified
Adverse
Yes
No
Yes
D)
Disclaimer
Qualified
Adverse
No
Yes
Yes
5) A qualified opinion can be issued for which of the following?
I. When a limitation on the scope of the audit has occurred
II. When the auditor lacks independence
III. When generally accepted accounting principles have not been used
A) I and II
B) I and III
C) II and III
D) I, II and III
6) In which situation would the auditor be choosing between “except for” qualified opinion and
an adverse opinion?
A) The auditor lacks independence.
B) A client-imposed scope limitation
C) A circumstance-imposed scope limitation
D) Lack of full disclosure within the footnotes
7) When the auditor determines that the financial statements are fairly stated, but there is a
nonindependent relationship between the auditor and the client, the auditor should issue
A) an adverse opinion.
B) a disclaimer of opinion.
C) either a qualified opinion or an adverse opinion.
D) either a qualified opinion or an unqualified opinion with modified wording.
8) If the auditor lacks independence, a disclaimer of opinion must be issued
A) if the client requests it.
B) only if it is highly material.
C) only if it is material but not pervasive.
D) in all cases.
9) If the phrase “except for” is present in the opinion paragraph of the audit report, the auditor
has issued a(n)
A) adverse opinion.
B) disclaimer of opinion.
C) unqualified opinion.
D) qualified opinion.
10) When analyzing the various types of opinions that the auditor can issue,
A) an adverse opinion must contain the phrase “except for” in the opinion paragraph.
B) an adverse opinion can only be issued when there is a lack of knowledge by the auditor.
C) a disclaimer of opinion can be issued for material or immaterial misstatements.
D) a qualified opinion report can be used only when the auditor concludes that the overall
financial statements are fairly stated.
11) Items that materially affect the comparability of financial statements generally require
disclosure in the footnotes. If the client refuses to properly disclose the item, the auditor will
most likely issue
A) a disclaimer.
B) an unqualified opinion.
C) a qualified opinion.
D) an adverse opinion.
12) Which of the following scenarios does not result in a qualified opinion?
A) A scope limitation prevents the auditor from completing an important audit procedure.
B) Circumstances exist that prevent the auditor from conducting a complete audit.
C) The auditor lacks independence with respect to the audited entity.
D) An accounting principle at variance with GAAP is used.
13) Whenever the client imposes restrictions on the scope of the audit, the auditor should be
concerned that management may be trying to prevent discovery of misstatements. In such cases,
the auditor will likely issue a
A) disclaimer of opinion in all cases.
B) qualification of both scope and opinion in all cases.
C) disclaimer of opinion whenever materiality is in question.
D) qualification of both scope and opinion whenever materiality is in question.
14) In which of the following circumstances would an auditor most likely express an adverse
opinion?
A) The CEO refuses to let the auditor have access to the board of director meeting minutes.
B) The financial statements are not in conformity with the FASB statement on loss
contingencies.
C) Information comes to the auditor’s attention that raises substantial doubt about the ability for
the client to continue as a going concern.
D) Tests of controls show that the internal control structure is so poor that the auditor has to
assess control risk at the maximum.
15) Which of the following statements is true?
I. The auditor is required to issue a disclaimer of opinion in the event of a material uncertainty.
II. The auditor is required to issue a disclaimer of opinion in the event of a going concern
problem.
A) I only
B) II only
C) I and II
D) Neither I nor II
16) The most common case in which conditions beyond the client’s and auditor’s control cause a
scope restriction in an engagement is when the
A) auditor is not appointed until after the client’s year-end.
B) client won’t allow the auditor to confirm receivables for fear of offending its customers.
C) auditor doesn’t have enough staff to satisfactorily audit all of the client’s foreign subsidiaries.
D) client is going through Chapter 11 bankruptcy.
17) When the client fails to make adequate disclosure in the body of the statements or in the
related footnotes, it is the responsibility of the auditor to
A) inform the reader that disclosure is not adequate, and to issue an adverse opinion.
B) inform the reader that disclosure is not adequate, and to issue a qualified opinion.
C) present the information in the audit report and issue an unqualified or qualified opinion.
D) present the information in the audit report and to issue a qualified or an adverse opinion.
18) There are three conditions necessitating a departure from an unqualified audit report. Name,
discuss and state the appropriate audit report for each of these three conditions.
19) A qualified opinion audit report is issued when all auditing conditions have been met, no
significant misstatements have been discovered, and it is the auditor’s opinion that the financial
statements are fairly stated in accordance with GAAP.
20) Auditors should issue a disclaimer of opinion when there is a highly material client-imposed
scope restriction.
21) Whenever an auditor issues a qualified report, he or she must use the term “except for ” in
the opinion paragraph.
22) A qualified report can take the form of a qualification of both the scope and the opinion or of
the opinion alone.
23) When an auditor discovers a highly material GAAP violation in the financial statements and
the client refuses to correct it, the auditor should issue a disclaimer of opinion.
24) Client imposed restrictions on the audit always require a disclaimer of opinion.
25) An auditor should issue a qualified opinion with an explanatory paragraph whenever there is
a material uncertainty affecting the financial statements.
3.6 Learning Objective 3-6
1) A misstatement in the financial statements can be considered material if knowledge of the
misstatement will affect a decision of
A) the PCAOB.
B) a reasonable user of the financial statements.
C) an accountant.
D) the SEC.
2) Misstatements must be compared with some measurement base before a decision can be made
about materiality. A commonly accepted measurement base includes
A) net income.
B) total assets.
C) working capital.
D) all of the above.