Chapter 15 – Audit Reports on Financial Statements
66. In which one of the following cases would an auditor most likely issue a qualified opinion?
a.
There is a highly material, and very pervasive departure from SFAS No. 141 and No. 142.
b.
There is a change in accounting principles promulgated by the FASB.
c.
There is an immaterial dollar misstatement on the financial statements.
d.
There is one material departure from GAAP that is affects only two accounts.
AUDT.JOHN.16.15-04 – LO: 15-04
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Qualified Audit Reports
67. Qualified opinions can only be issued by auditors for which of the following?
a.
Violations of GAAP.
b.
Scope limitations.
c.
Going concern.
d.
Lack of independence.
e.
Either A and B.
AUDT.JOHN.16.15-04 – LO: 15-04
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Qualified Audit Reports
68. Violations of GAAP resulting in qualified opinions affect the standard audit report through which of the
following?
a.
b.
c.
d.
e.
AUDT.JOHN.16.15-04 – LO: 15-04
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
69. Which of the following is an example of circumstances that would not limit the audit scope?
Qualified Audit Reports
Chapter 15 – Audit Reports on Financial Statements
a.
An inadequacy in the accounting records.
b.
The inability to gather sufficient competent evidence.
c.
Emphasis of an important matter.
d.
The timing of the fieldwork.
1
AUDT.JOHN.16.15-04 – LO: 15-04
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Qualified Audit Reports
70. Which of the following phrases should not be used when the auditor is qualifying the audit opinion?
a.
Except for.
b.
Subject to.
c.
With the exception of.
d.
With the qualification of.
b
1
AUDT.JOHN.16.15-04 – LO: 15-04
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Qualified Audit Reports
71. If a client expensed the acquisition cost of some assets that should have been capitalized and depreciated
them over their useful lives, which of the following would be incorrect?
a.
A qualified opinion would be appropriate.
b.
The opinion paragraph should be modified to include language such as: “except for the effects of not
capitalizing the acquisition costs of some assets…”
c.
An explanatory paragraph should include the effects of the subject matter of the qualification, where
practicable.
d.
An explanatory paragraph should be modified to include language such as: “subject to the qualified
act…”
d
1
AUDT.JOHN.16.15-04 – LO: 15-04
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Qualified Audit Reports
72. Adverse opinions can only be issued by auditors based on which of the following?
a.
Violations of GAAP.
b.
Scope limitations.
Chapter 15 – Audit Reports on Financial Statements
c.
Going concern.
d.
Lack of independence.
e.
Either B or D.
1
AUDT.JOHN.16.15-05 – LO: 15-05
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Adverse Audit Reports
73. Adverse opinions affect the standard audit report in which of the following ways?
a.
Modifying the scope paragraph.
b.
Adding an explanatory paragraph before the opinion paragraph.
c.
Modifying the opinion paragraph to read “ does not present fairly.”
d.
Both B and C.
e.
All of the above.
1
AUDT.JOHN.16.15-05 – LO: 15-05
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Adverse Audit Reports
74. The opinion paragraph of the audit report for Schnook Co. states that the financial statements “do not
present fairly”. Which type of audit report is this?
a.
Improper.
b.
Adverse.
c.
Disclaimer.
d.
Qualified.
b
1
AUDT.JOHN.16.15-05 – LO: 15-05
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Adverse Audit Reports
75. An audit of the Flagler Company, a diamond mining company, brings to light the fact that its equipment has
been marked up to the owners’ expectation of market values. Such a situation will most likely result in which
type of report?
a.
Disclaimer.
b.
Review.
c.
Adverse.
Chapter 15 – Audit Reports on Financial Statements
d.
Unqualified with explanatory language.
AUDT.JOHN.16.15-05 – LO: 15-05
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Adverse Audit Reports
76. In which one of the following instances would an auditor most likely issue an adverse opinion?
a.
Management declines to present earnings per share in the income statement.
b.
There is substantial doubt about the entity’s ability to continue as a going concern.
c.
There is a material dollar misstatement that overshadows the overall financial statements.
d.
The client does not allow the auditor to send confirmations to its three largest customers.
AUDT.JOHN.16.15-05 – LO: 15-05
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Adverse Audit Reports
77. When an auditor is faced with a material departure from GAAP that is pervasive, which of the following
should the audit report contain?
a.
An unqualified opinion.
b.
A qualified opinion with an explanatory paragraph.
c.
An adverse opinion.
d.
A disclaimer of opinion.
AUDT.JOHN.16.15-05 – LO: 15-05
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Adverse Audit Reports
78. In which of the following circumstances would an auditor be most likely to express an adverse opinion on a
company’s financial statements?
a.
The client has had significant transactions with related entities that the auditor wants to emphasize.
b.
The financial statements are not in conformity with FASB requirements regarding the capitalization
of leases.
c.
The auditor is not independent.
d.
There is substantial doubt about the entity’s ability to continue as a going concern.
79. When an auditor issues an adverse opinion, which of the following should be included in the opinion
paragraph?
a.
The financial statement effects of the departure from GAAP.
b.
A statement that indicates that the financial statements are fairly stated except for a reason that is
described in the separate paragraph.
c.
A reference to a separate paragraph that describes the reason for the adverse opinion.
d.
The reasons that the financial statements are misleading.
1
AUDT.JOHN.16.15-05 – LO: 15-05
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Adverse Audit Reports
80. In which one of the following instances would an auditor most likely issue a disclaimer of opinion?
a.
Management will not sign a management representation letter.
b.
Management declines to provide a statement of cash flow.
c.
The auditor is independent of the client.
d.
The auditor is unable to confirm receivables but performs alternative procedures.
1
AUDT.JOHN.16.15-06 – LO: 15-06
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Audit Reports with a Disclaimer of Opinion
81. In which one of the following instances would an auditor not issue a disclaimer of opinion?
a.
The auditors are not invited to the periodic inventory at year end.
b.
There are significant misstatements in the financial statements.
c.
There is a significant limitation on the scope of the engagement.
d.
There is insufficient evidence for the auditor to form an opinion on the fairness of the financial
statements.
b
1
AUDT.JOHN.16.15-05 – LO: 15-05
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Adverse Audit Reports
82. When an auditor lacks independence with respect to a client, which of the following should the auditor
issue?
a.
A disclaimer of opinion.
b.
An adverse opinion.
c.
A qualified opinion with explanatory paragraph.
d.
An unqualified opinion.
AUDT.JOHN.16.15-06 – LO: 15-06
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Audit Reports with a Disclaimer of Opinion
83. When the auditor is not independent with respect to a client, what must the auditor do?
a.
Not accept an audit engagement.
b.
Include a separate paragraph in the audit report stating the lack of independence.
c.
Provide a review report.
d.
Report the non-compliance to the AICPA.
AUDT.JOHN.16.15-06 – LO: 15-06
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Audit Reports with a Disclaimer of Opinion
84. Disclaimers of opinion can only be issued by auditors based on which of the following?
a.
Violations of GAAP.
b.
Substantial scope limitations.
c.
Going concern.
d.
Lack of independence.
e.
Either B or D.
AUDT.JOHN.16.15-06 – LO: 15-06
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Audit Reports with a Disclaimer of Opinion
85. Scope limitations resulting in disclaimers under U.S. auditing standards affect the standard audit report
through which of the following?
Audit Reports with a Disclaimer of Opinion
Chapter 15 – Audit Reports on Financial Statements
a.
Modifying the introductory paragraph
b.
Eliminating the scope paragraph.
c.
Adding an explanatory paragraph before the disclaimer paragraph.
d.
Both B and C.
e.
All of the above.
1
AUDT.JOHN.16.15-06 – LO: 15-06
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Audit Reports with a Disclaimer of Opinion
86. A justified departure from GAAP may result in which of the following?
a.
A disclaimer of an audit opinion.
b.
An unqualified audit opinion with an explanatory paragraph either before or after the opinion
paragraph.
c.
An adverse opinion.
d.
A qualified opinion.
b
1
AUDT.JOHN.16.15-07 – LO: 15-07
United States – AK – AICPA BB-Critical thinking
Comparisons of Modifications to the Standard Unqualified Audit Report
87. A justified departure from GAAP may result in which of the following?
a.
A disclaimer of an audit opinion.
b.
An adverse opinion.
c.
An unqualified audit opinion with an explanatory paragraph before the opinion paragraph or a
qualified opinion.
d.
A standard unqualified opinion.
1
AUDT.JOHN.16.15-07 – LO: 15-07
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Comparisons of Modifications to the Standard Unqualified Audit Report
88. An emphasis of a matter may result in which of the following?
a.
A disclaimer of an audit opinion.
b.
A qualified audit opinion.
Chapter 15 – Audit Reports on Financial Statements
c.
An adverse opinion.
d.
An unqualified audit opinion with an explanatory paragraph either before or after the opinion
paragraph.
d
AUDT.JOHN.16.15-07 – LO: 15-07
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Comparisons of Modifications to the Standard Unqualified Audit Report
89. A reference to another auditor under U.S. auditing standards may result in which of the following?
a.
A disclaimer of an audit opinion.
b.
A qualified audit opinion.
c.
An adverse opinion.
d.
An unqualified audit opinion with modified wording for all three paragraphs.
d
1
AUDT.JOHN.16.15-07 – LO: 15-07
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Comparisons of Modifications to the Standard Unqualified Audit Report
90. When might an auditor modify the introductory paragraph and replace the scope paragraph with explanatory
paragraph?
a.
When a scope limitation exists.
b.
When there is substantial doubt about going-concern.
c.
When the auditor lacks independence.
d.
When there is an emphasis of a matter.
1
AUDT.JOHN.16.15-07 – LO: 15-07
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Comparisons of Modifications to the Standard Unqualified Audit Report
91. PCAOB Auditing Standard 5 does not identify which of the following situations as one in which the auditor
will modify the audit report on ICFR effectiveness?
a.
When there is a restriction on the scope of the engagement.
b.
When there is other information contained in management’s annual report on ICFR.
c.
When elements of management’s annual report on internal control are incomplete or improperly
presented.
d.
When the annual report includes a copy of the annual certification pursuant to Section 302 of the
Chapter 15 – Audit Reports on Financial Statements
Sarbanes-Oxley Act.
d
1
AUDT.JOHN.16.15-08 – LO: 15-08
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Audit Reports on Internal Control over Financial Reporting
92. When there is a restriction on the scope of the internal control over financial reporting (ICFR) engagement,
what should the auditor do?
a.
The auditor will either withdraw from the engagement or disclaim an opinion.
b.
The auditor will issue an adverse opinion.
c.
The auditor will issue an opinion on the ICFR based on another audit firm’s work.
d.
The auditor will report this directly to the Treadway Commission.
1
AUDT.JOHN.16.15-08 – LO: 15-08
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Audit Reports on Internal Control over Financial Reporting
93. In which of the following situations would the auditor modify the audit report on ICFR?
a.
When the auditor relies on the work of other auditors but decides not to include a reference to the
other auditors.
b.
When the auditor is unable to perform all procedures needed to evaluate the internal controls.
c.
When the auditor concludes that management’s report on ICFR is not complete or is improperly
presented.
d.
When the auditor identifies multiple unrelated significant deficiencies in ICFR.
1
AUDT.JOHN.16.15-08 – LO: 15-08
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Audit Reports on Internal Control over Financial Reporting
94. When management chooses to include information in its report on ICFR that is in addition to the
information required to be provided, what should the auditor do?
a.
The auditor must endorse the information.
b.
The auditor must include the information as part of the opinion.
c.
The auditor will disclaim an opinion on that additional information.
d.
The auditor will present the information in a separate schedule in the footnotes.
95. Types of Audit Opinions
What are the five basic types of financial statement audit reports?
96. Types of Audit Opinions
Aloe Products is an online retailer of lotions and other beauty supplies. The company records revenues at the
time that the customer orders are placed on the website, rather than when goods are shipped. Goods are
typically shipped two days after the order is places. The auditor determines that the amount of orders placed but
not shipped as of the balance sheet date is not material.
REQUIRED:
Which type of audit report would you suggest be issued and why?
97. Types of Audit Opinions
A CPA, engaged in the audit of financial statements of a large manufacturer with branch offices that are widely
dispersed, is not able to count the substantial undeposited cash receipts at the close of business on the last day of
the fiscal year at all branches. As an alternative to this procedure to verify the accurate cutoff of cash receipts,
Chapter 15 – Audit Reports on Financial Statements
the CPA observes that deposits in transit as shown on the year-end bank reconciliation appeared as credits on
the bank statement on the first business day of the New Year. Based on this, the auditor was satisfied as to the
cutoff of cash receipts.
REQUIRED:
Which type of audit report would you suggest be issued this year and why?
opinion or a disclaimer, depending on materiality. However, in this case, it appears
1
AUDT.JOHN.16.15-02 – LO: 15-02
United States – BUSPORG: Analytic
United States – BUSPROG: Communication
Standard Unqualified Audit Reports
98. Unqualified audit reports
For each of the following situations, define the type of problem encountered and provide an explanation as to
the type of report which was issued.
Situation
Report Issued
The auditor is unable to confirm three
customer accounts receivable.
Unqualified Standard
The client forgot to accrue a contingent
liability.
Unqualified Standard
The auditor believes there is substantial
doubt regarding the client’s ability to
continue as a going concern.
Unqualified with Explanatory Paragraph
The client properly adopts a new
accounting principle promulgated by the
FASB
Unqualified with Explanatory Paragraph
1
99. Unqualified reports
Under what circumstances would an auditor issue an unqualified opinion modified by an explanatory
paragraph? Would the paragraph go before or after the opinion paragraph?
100. Types of Audit Opinions
A CPA has completed an audit of the financial statements of a long-haul trucking company for the year ended
December 31, 2014. Prior to 2014, the company depreciated its trucks over 10 years. However, during 2014, the
company determined that a more realistic estimated life for its trucks was 8 years and computed the 2014
depreciation on the basis of the revised estimate. The CPA is satisfied that the 8 year estimate is reasonable, but
the change will have a material effect on the comparability of the company’s financial statements. The company
adequately disclosed the change in estimated useful lives of its trucks and the effect of the change on 2014
income in a note to the financial statements.
REQUIRED:
Which type of audit report would you suggest be issued on the 2014 financial statements and why?
101. Types of Audit Opinions
Bacon, CPAs, is the principal auditor for Martin Industries, a U.S. public company. However, Bacon decides to
refer to the work of Hsu and Wen, CPAs, who audited a wholly owned subsidiary of the entity and issued an
unqualified opinion.
REQUIRED:
Which type of audit report would you suggest be issued this year and why?
1
AUDT.JOHN.16.15-03 – LO: 15-03
United States – BUSPORG: Analytic
United States – BUSPROG: Communication
Unqualified Audit Reports with Explanatory Language
102. Types of Audit Opinions
For each of the following independent situations, determine the type of opinion that will most likely be issued
by the firm auditing the financial statements of a U.S. company.
1.
The client will not allow the auditor to view the minutes for the entire year under
audit and beyond.
2.
The auditor finds that the firm is not independent of the client on the last day of
fieldwork.
3.
The client declines to include a statement of cash flow in the financial statements.
4.
The client fails to record an immaterial amount of insurance paid in advance as an
asset.
5.
The client does not record impairment of goodwill and will not depreciate property
and equipment. Both are considered very material.
6.
There is substantial doubt about the client’s ability to continue as a going concern.
client imposed scope limitation).
1
AUDT.JOHN.16.15-03 – LO: 15-03
United States – BUSPORG: Analytic
United States – BUSPROG: Communication
the financial statements.
103. Qualified opinions
Under what circumstances would an auditor issue a qualified opinion?
104. Types of Audit Opinions
On January 2, 2014, the Zoom Detail Shoppe received notice from its primary supplier that all wholesale prices
were being increased by 10%, effective immediately. Based on this notice, Zoom revalued is December 31,
2013 inventory to reflect the higher costs. The inventory is a large proportion of the total assets. The effect of
the revaluation was material to current assets, but not to total assets or net income. The increase is adequately
Chapter 15 – Audit Reports on Financial Statements
disclosed in the footnotes.
REQUIRED:
Which type of audit report would you suggest be issued this year and why?
adverse opinion.
United States – BUSPROG: Communication
105. Types of Audit Opinions
Subsequent to the date of the financial statements, as part of post-balance sheet date audit procedures, a CPA
learned that a recent fire caused significant damage to one of the client’s two manufacturing facilities. However,
the loss will not be reimbursed by insurance. Newspapers in the area describe the event in detail and the event is
widely known. The financial statements and related notes as prepared by the client did not disclose the fire loss.
REQUIRED:
Which type of audit report would you suggest be issued this year and why?
106. Types of Audit Opinions
For the past five years, Clark CPAs has audited the financial statements of a manufacturing company. During
this period, the audit scope was limited by the client as to the observation of the annual physical inventory.
Because Clark CPAs considers the inventories to be material and was not able to satisfy the audit requirements
by using other auditing procedures, the firm was unable to express an unqualified opinion on the financial
statements in each of the five years.
The CPA was allowed to observe physical inventories for the current year ended December 31, 2014, because
the client’s bank would no longer accept the audit reports. However, to minimize audit fees, the client requested
that the CPA not extend audit procedures to the inventory as of the beginning of the year, January 1, 2014.
Chapter 15 – Audit Reports on Financial Statements
REQUIRED:
Which type of audit report would you suggest be issued this year and why?
107. Adverse opinions
Under what circumstances would an auditor issue an adverse opinion?
108. Disclaimers
Discuss what a disclaimer is, when it is issued, and how it would affect the format of a standard three paragraph
audit report.
109. Types of Audit Opinions
During the course of an audit of the financial statements of Glover Industries, a CPA is refused permission to
inspect the minutes from the board of directors meetings. The CPA is instead offered a certified copy of all
resolutions and actions involving accounting matters.
REQUIRED:
Which type of audit report would you suggest be issued this year and why?