Auditing and Assurance Services, 16e (Arens/Elder/Beasley)
Chapter 3 Audit Reports
3.1 Learning Objective 3-1
1) Which of the following is a correct statement regarding the standard unmodified opinion audit
report?
A) The format of the audit report for public and nonpublic entities are identical.
B) The auditor’s responsibility paragraph includes a statement that the auditors are responsible
for selecting the appropriate accounting principles.
C) The audit report includes the name of the lead partner on the audit.
D) The scope paragraph includes a statement that the auditor considers internal controls when
designing the audit procedures performed.
2) Auditing standards require that the audit report must be titled and that the title must
A) include the word “independent.”
B) indicate if the auditor is a CPA.
C) indicate if the auditor is a proprietorship, partnership, or corporation.
D) indicate the type of audit opinion issued.
3) To emphasize the fact that the auditor is independent, a typical addressee of the audit report
could be
A)
Company Controller
Shareholders
Board of Directors
No
Yes
Yes
B)
Company Controller
Shareholders
Board of Directors
No
No
Yes
C)
Company Controller
Shareholders
Board of Directors
Yes
Yes
No
D)
Company Controller
Shareholders
Board of Directors
Yes
No
No
4) The auditor’s responsibility section of the standard unmodified opinion audit report states that
the audit is designed to
A) discover all errors and/or irregularities.
B) discover material errors and/or irregularities.
C) conform to generally accepted accounting principles.
D) obtain reasonable assurance whether the statements are free of material misstatement.
5) The audit report date on a standard unmodified opinion audit report indicates
A) the last day of the fiscal period.
B) the date on which the financial statements were filed with the Securities and Exchange
Commission.
C) the last date on which users may institute a lawsuit against either the client or the auditor.
D) the last day of the auditor’s responsibility for the review of significant events that occurred
after the date of the financial statements.
6) The standard audit report for nonpublic entities refers to GAAS and GAAP in which sections?
A)
GAAS
GAAP
Auditor’s responsibility
Auditor’s responsibility
B)
GAAS
GAAP
Auditor’s responsibility
Introductory paragraph
C)
GAAS
GAAP
Management’s responsibility
and Opinion paragraph
Management’s responsibility
and Introductory paragraph
D)
GAAS
GAAP
Auditor’s responsibility
Management’s responsibility
and Opinion paragraph
7) Which of the following is not explicitly stated in the standard unmodified opinion audit
report?
A) The financial statements are the responsibility of management.
B) The audit was conducted in accordance with generally accepted accounting principles.
C) The auditors believe that the audit evidence provides a reasonable basis for their opinion.
D) An audit includes assessing the accounting estimates used.
8) The standard unmodified opinion audit report for a nonpublic entity must
A) have a report title that includes the word “CPA.”
B) be addressed to the company’s stockholders and creditors.
C) be dated.
D) include an explanatory paragraph.
9) The management’s responsibility section of the standard unmodified opinion audit report for a
nonpublic company states that the financial statements are
A) the responsibility of the auditor.
B) the responsibility of management.
C) the joint responsibility of management and the auditor.
D) none of the above.
10) The introductory paragraph of the standard unmodified opinion audit report for a nonpublic
company performs which functions?
I. It states the CPA has performed an audit.
II. It lists the financial statements being audited.
III. It states the financial statements are the responsibility of the auditor.
A) I and II
B) I and III
C) II and III
D) I, II and III
11) Which of the following statements are true for the standard unmodified opinion audit report
of a nonpublic entity?
I. The introductory paragraph states that management is responsible for the preparation and
content of the financial statements.
II. The scope paragraph states that the auditor evaluates the appropriateness of accounting
policies used and the reasonableness of significant accounting estimates made by management.
A) I only
B) II only
C) I and II
D) Neither I nor II
12) The auditor’s responsibility section of the standard unmodified opinion audit report states
that the auditor is
A) responsible for the financial statements and the opinion on them.
B) responsible for the financial statements.
C) responsible for the opinion on the financial statements.
D) jointly responsible for the financial statements with management.
13) If the balance sheet of a private company is dated December 31, 2016, the audit report is
dated February 8, 2017, and both are released on February 15, 2017, this indicates that the
auditor has searched for subsequent events that occurred up to
A) December 31, 2016.
B) January 1, 2017.
C) February 8, 2017.
D) February 15, 2017.
14) The appropriate audit report date for a standard unmodified opinion audit report for a
nonpublic entity should be
A) the date the financial statements are given to the Board of Directors.
B) the date of the financial statements.
C) the date the auditor completed the auditing procedures in the field.
D) 60 days after the date of the financial statements as required by the SEC.
15) Most auditors believe that financial statements are “presented fairly” when the statements are
in accordance with GAAP, and that it is also necessary to
A) determine that they are not in violation of FASB statements.
B) examine the substance of transactions and balances for possible misinformation.
C) review the statements using the accounting principles promulgated by the SEC.
D) assure investors that net income reported this year will be exceeded in the future.
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16) An audit report prepared by Garrett and Brown, CPAs, is provided below. The audit for the
year ended December 31, 2016 was completed on March 1, 2017, and the report was issued to
Javlin Corporation, a private company, on March 13, 2017. List any deficiencies in this report.
Do not rewrite the report.
We have examined the accompanying financial statements of Dalton Corporation as of
December 31, 2016. These financial statements are the responsibility of the company’s
management.
Management’s Responsibility for the Financial Statements:
Management is responsible for the preparation and fair presentation of the financial statements in
accordance with generally accepted auditing standards; this includes the design, implementation,
and maintenance of internal control relevant to the preparation and fair presentation of financial
statements that are free from all misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to give an opinion on these financial statements based on our audit. We
conducted our audit in accordance with auditing standards generally accepted throughout the
world. Those standards require that we plan and perform the audit to obtain absolute assurance
about whether the financial statements are free of misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and
disclosures in the financial statements. The procedures selected depend on management’s
judgment, including the assessment of the risks of material misstatement of the income
statement, whether due to fraud or error. In making those risk assessments, the auditor considers
internal control relevant to the auditor’s preparation and fair presentation of the financial
statements in order to design audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An
audit also includes evaluating the appropriateness of accounting policies and the accuracy of
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 accurately the financial position
of Javlin Corporation as of December 31, 2016, in conformity with accounting principles
generally accepted in the United States of America.
Garrett and Brown, CPAs
March, 2017
17) Describe the standard unmodified opinion audit report to be issued for an audit of a private
company. Begin by specifying the eight parts of the report, and then discuss the contents of each
part.
18) EPM, Inc., is a private manufacturing company with a calendar year-end. Their financial
statements include a balance sheet, a statement of income, statement of cash flows, and statement
of stockholders’ equity. For the most recent audit, Harrington and Perry, LLP, audited the 2015
and 2016 financial statements. The auditors completed all significant fieldwork on March 5,
2017 and issued the audit report on March 16, 2017.
Required:
Consider all the facts given and write the standard unmodified opinion audit report, including all
eight sections of the report.
19) An audit provides a guarantee that a material misstatement will not exist in the financial
statements.
20) AICPA auditing standards provide uniform wording for the auditor’s report to enable users of
the financial statements to understand the audit report.
21) Users of the financial statements rely on the auditor’s report because of the absolute
assurance the report provides.
22) The introductory paragraph of the auditor’s report states that the auditor is responsible for the
preparation, presentation and opinion on financial statements.
23) The audit report date is the date the auditor completed audit procedures in the field.
24) The scope paragraph of the auditor’s responsibility section of the audit report issued for
financial statements of a nonpublic company should refer to auditing standards generally
accepted in the United States of America.
25) In the scope paragraph of the audit report issued for financial statements of a nonpublic
company, the auditor expresses an opinion about the internal controls of the company.
26) The audit report is normally addressed to the company’s president or chief executive officer.
27) The phrase “accounting principles generally accepted in the United States of America” can
be found in the opinion paragraph of a standard unmodified opinion report.
28) The date of the auditor’s report is indicative of the last day of the auditor’s responsibility for
the review of significant events occurring after the balance sheet date.
29) The phrase “auditing standards generally accepted in the United States of America” can be
found in the opinion paragraph of a standard unmodified opinion report for a nonpublic
company.
30) The phrase “Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free from material error” is included in the
auditor’s opinion section of an audit report.
3.2 Learning Objective 3-2
1) What category of audit report will be issued if the auditor concludes that the financial
statements are not fairly presented?
A) disclaimer
B) qualified
C) standard unmodified opinion
D) adverse
2) The standard unmodified audit report
A) is sometimes called a clean opinion.
B) can be issued only with an explanatory paragraph.
C) can be issued if only a balance sheet and income statement are included in the financial
statements.
D) is sometimes called a disclaimer report.
3) An audit of historical financial statements most commonly includes the
A) balance sheet, statement of retained earnings, and the statement of cash flows.
B) income statement, the statement of cash flows, and the statement of net working capital.
C) statement of cash flows, balance sheet, and the statement of retained earnings.
D) balance sheet, income statement, statement of cash flows, and the statement of changes in
stockholders’ equity.
4) When analyzing the various types of audit reports,
A) the unmodified opinion with an emphasis-of-matter paragraph is the most common type of
report.
B) companies will generally make the appropriate changes to their accounting records to avoid a
qualification by the auditor.
C) management is more concerned about a qualified report than a disclaimer report.
D) an adverse report is issued when the auditor is unable to form an opinion on the financial
statements.
5) There are four conditions that must be met before an auditor can issue a standard unmodified
opinion audit report for the audit of a private company. Please discuss each of these five
conditions.
6) Financial statement users are normally much more concerned about a disclaimer than an
unmodified opinion audit report that contains an additional-emphasis-of-matter paragraph.
7) An auditor will issue a disclaimer when he concludes that the financial statements are not
fairly presented.
3.3 Learning Objective 3-3
1) Whenever an auditor issues an audit report for a public company, the auditor can choose to
issue a report in which of the following forms?
I. A combined report on financial statements and internal control over financial reporting
II. Separate reports on financial statements and internal control over financial reporting
A) I only
B) II only
C) either I or II
D) neither I nor II
2) The unqualified opinion audit report for public entities includes the following three
paragraphs:
A) introductory, scope and management’s responsibility.
B) materiality, scope and report.
C) introductory, scope and opinion.
D) scope, fieldwork and conclusion.
3) Auditing standards for public companies are established by the
A) SEC.
B) FASB.
C) PCAOB.
D) IRS.
4) Under PCAOB standards
A) the standard unmodified opinion audit report is referred to as an unqualified opinion audit
report.
B) the scope paragraph states that the financial statements are the responsibility of management.
C) internal controls of a public company must be audited every five years.
D) the scope paragraph is the same as the scope paragraph for private companies.
5) The separate report on internal control over financial reporting
A) cannot contain a cross-reference to the auditor’s report on the financial statements.
B) includes a paragraph that addresses the inherent limitations of internal controls.
C) is addressed to the PCAOB.
D) includes a scope paragraph which refers to the framework used to evaluate internal controls.
6) Section 404(b) of the Sarbanes Oxley Act requires that the auditor of a public company attest
to management’s report on the efficiency of internal controls over financial reporting.
7) Auditors of public company financial statements must issue separate reports on internal
control over financial reporting.
8) PCAOB standards use the term “unqualified opinion” to refer to the standard unmodified
opinion audit report.
3.4 Learning Objective 3-4
1) Examples of unmodified opinions which contain modified wording (without adding an
explanatory paragraph) include
A) the use of other auditors.
B) the lack of consistent application of generally accepted accounting principles.
C) substantial doubt about the audited company (or the entity) continuing as a going concern.
D) lack of consistent application of GAAP.
2) A CPA may wish to emphasize specific matters regarding the financial statements even
though an unqualified opinion will be issued. Normally, such explanatory information is
A) included in the scope paragraph.
B) included in the opinion paragraph.
C) included in a separate paragraph in the report.
D) included in the introductory paragraph.
3) All of the following are causes for the addition of an explanatory paragraph under both
AICPA and PCAOB standards except for
A) emphasis of a matter.
B) reports involving other auditors.
C) lack of consistent application of generally accepted accounting principles.
D) auditor agrees with a departure from promulgated accounting principles.
4) The term “explanatory paragraph” was replaced in the AICPA auditing standards with
A) going concern paragraph.
B) emphasis-of-matter paragraph.
C) departure from principles paragraph.
D) consistency paragraph.
5) Which of the following are changes that affect the comparability of financial statements but
not the consistency and therefore, do not have to be included in the auditor’s report?
A) error corrections not involving principles
B) changes in accounting estimates
C) variations in the format and presentation of financial information
D) all of the above
6) Which of the following is least likely to cause uncertainty about the ability of an entity to
continue as a going concern?
A) The entity is suing a competitor for a minor patent infringement.
B) The entity has lost a major customer.
C) The entity has significant recurring operating losses.
D) The entity has working capital deficiencies.