Chapter 15 – Audit Reports on Financial Statements
1. For the last several years, both the Financial Accounting Standards Board (FASB) and the International
Auditing and Assurance Standards Board (IAASB) have been considering possible changes to the standard
unqualified audit report.
a.
True
b.
False
False
1
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Audit Reporting Principles
2. The audit report can be a verbal presentation to the audit committee about the client.
a.
True
b.
False
False
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Audit Reporting Principles
3. There are no differences in audit report requirements across the standards of the AICPA, PCAOB, and
IAASB.
a.
True
b.
False
False
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Audit Reporting Principles
4. The auditor should only provide an opinion on the financial statements if the opinion indicates that the
financial statements are fairly stated in all material respects.
a.
True
b.
False
False
1
5. The audit report delineates the responsibility of client management and that of the audit firm.
a.
True
b.
False
True
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Standard Unqualified Audit Reports
6. A client that has a departure from generally accepted accounting principles that is immaterial will receive a
qualified or adverse opinion.
a.
True
b.
False
False
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Standard Unqualified Audit Reports
7. For some engagements, the financial statements might be audited in accordance with multiple auditing
standards.
a.
True
b.
False
True
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Standard Unqualified Audit Reports
8. When there is an uncertainty surrounding the financial statements, the auditor may still be able to give an
unqualified opinion.
a.
True
b.
False
True
Audit Reporting Principles
9. An important component of an audit report is that the title includes the word “competent.”
a.
True
b.
False
False
1
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Standard Unqualified Audit Reports
10. Andrews Corporation adopted an accounting principle that is a material departure from GAAP. The auditor
determined that the financial statements are fairly presented, except for this specifically identifiable GAAP
departure, and therefore would issue a disclaimer of opinion.
a.
True
b.
False
False
1
AUDT.JOHN.16.15-03 – LO: 15-03
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Unqualified Audit Reports with Explanatory Language
11. The audit report is modified to five paragraphs as a result of another audit firm performing part of the
financial statement audit.
a.
True
b.
False
False
1
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Unqualified Audit Reports with Explanatory Language
12. A justified departure from GAAP will result in the issuance of an adverse opinion.
a.
True
b.
False
United States – AK – AICPA BB-Critical thinking
Standard Unqualified Audit Reports
13. When financial statements contain generally accepted accounting principles in the current year that are
different from the generally accepted accounting principles used in the preceding year, the auditor will typically
make mention of it in the opinion.
a.
True
b.
False
True
1
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Unqualified Audit Reports with Explanatory Language
14. After the balance sheet date but prior to the audit report date the client decides to acquire Bargain Company
to obtain a significant increase in revenues. The auditor would probably give a report that includes the
statement: “except for the acquisition of Bargain Company…”.
a.
True
b.
False
False
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Unqualified Audit Reports with Explanatory Language
15. An unqualified audit opinion with an explanatory paragraph often makes reference to the footnotes of the
financial statements
a.
True
b.
False
True
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Unqualified Audit Reports with Explanatory Language
16. The substantial doubt about an entity’s ability to continue as a going concern is a phrase that is used in an
unqualified opinion with a certain type of explanatory language.
a.
True
b.
False
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Unqualified Audit Reports with Explanatory Language
Chapter 15 – Audit Reports on Financial Statements
True
1
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Unqualified Audit Reports with Explanatory Language
17. Under international auditing standards, when the audit client has engaged other audit firms to audit remote
locations around the country, the principal auditor must mention the other audit firms in the audit report.
a.
True
b.
False
False
1
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Unqualified Audit Reports with Explanatory Language
18. An auditor is not required to tell the reader of an audit report when there has been a change in accounting
principles that materially affects the financial statements.
a.
True
b.
False
False
1
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Unqualified Audit Reports with Explanatory Language
19. The term “except for” is used in the opinion paragraph of an audit report that will be qualified for a GAAP
violation that is not pervasive.
a.
True
b.
False
True
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Qualified Audit Reports
20. A client that treats a material lease transaction as an operating lease when it is in fact a capital lease has
deviated from GAAP and will receive a qualified or adverse opinion.
Chapter 15 – Audit Reports on Financial Statements
a.
True
b.
False
True
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Qualified Audit Reports
21. Restrictions on the scope of the audit whether imposed by the client or circumstances may require the
auditor to issue either a qualified or an adverse opinion.
a.
True
b.
False
False
1
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Qualified Audit Reports
22. For a change in accounting principles that management does not justify to the auditor, the auditor will likely
choose between a qualified and an adverse opinion.
a.
True
b.
False
True
1
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Qualified Audit Reports
23. Inconsistent application of accounting principles by the client is a GAAP violation and would result in a
qualified audit report.
a.
True
b.
False
False
1
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24. Uncertainties, such as doubt about the going concern of a client, may result in an adverse opinion.
a.
True
b.
False
False
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Adverse Audit Reports
25. If the auditor concludes that the financial statements taken as a whole are not fairly presented, the auditor
should issue an adverse opinion.
a.
True
b.
False
True
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Adverse Audit Reports
26. If scope limitations that are not client-imposed exist make it impossible for the auditor to form an opinion,
the auditor should render an adverse opinion.
a.
True
b.
False
False
1
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Adverse Audit Reports
27. The failure of a client to include a statement of cash flows will result in the issuance of a disclaimer of
opinion by the auditor.
a.
True
b.
False
False
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AUDT.JOHN.16.15-06 – LO: 15-06
28. When the auditor is unable to obtain sufficient, appropriate evidence concerning the beginning inventory,
which is material, the report is modified by adding an explanatory paragraph prior to the opinion paragraph and
appropriate modification to the scope paragraph.
a.
True
b.
False
False
1
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Audit Reports with a Disclaimer of Opinion
29. The client will not allow Collier and Company, CPAs to read the minutes of the board of director’s meetings
that occurred during the year under audit. Such a limitation will usually result in the auditor issuing a
disclaimer.
a.
True
b.
False
True
1
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Audit Reports with a Disclaimer of Opinion
30. If the firm auditing a company realizes that it is not independent with respect to the client, it will issue
disclaimer of opinion based on the inherent GAAP violation imposed by the audit firm.
a.
True
b.
False
False
1
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Audit Reports with a Disclaimer of Opinion
31. For a client with serious going concern issues the auditor has to make a choice between issuing an
unqualified audit report with an explanatory paragraph or a disclaimer.
a.
True
b.
False
32. An auditor can issue a disclaimer of opinion because of an inability to obtain sufficient appropriate
evidence.
a.
True
b.
False
True
1
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Audit Reports with a Disclaimer of Opinion
33. When circumstances preclude an auditor from performing certain procedures and the auditor can be satisfied
using other alternative procedures, a disclaimer of opinion will be rendered.
a.
True
b.
False
False
1
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Audit Reports with a Disclaimer of Opinion
34. The scope paragraph of an unqualified opinion primarily provides information relating to the division of
responsibilities.
a.
True
b.
False
35. Because of its importance, the decision about what type of opinion to issue is often made after consultation
with other professionals within the firm.
a.
True
b.
False
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Audit Reports with a Disclaimer of Opinion
36. If a significant scope limitation is imposed by the client, a disclaimer should ordinarily be issued.
a.
True
b.
False
37. The most difficult decisions about which opinion to issue are generally centered around decisions based on
the materiality level and pervasiveness of GAAP violations, the significance of scope limitations, and the
likelihood of the entity being a going concern.
a.
True
b.
False
38. The auditor is only concerned about the aggregate internal control deficiencies when determining the
appropriate opinion on internal control over financial reporting (ICFR).
a.
True
b.
False
False
1
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Audit Reports on Internal Control over Financial Reporting
39. The auditor will issue an unqualified opinion on ICFR if the auditor has identified only one material
weakness in ICFR.
a.
True
b.
False
False
1
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Comparisons of Modifications to the Standard Unqualified Audit Report
40. The auditor will modify the audit report on ICFR effectiveness when management’s annual certification
pursuant to Section 302 of the Sarbanes-Oxley Act is misstated.
a.
True
b.
False
True
1
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Audit Reports on Internal Control over Financial Reporting
41. If the auditor determines that management’s annual report on internal controls is incomplete or not properly
presented, the auditor’s report will include an explanatory paragraph that describes the reasons for this
determination.
a.
True
b.
False
True
1
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Audit Reports on Internal Control over Financial Reporting
42. The decision about whether to make reference to another auditor in the report on the audit of ICFR does not
differ from the corresponding decision as it relates to the audit of the financial statements.
a.
True
b.
False
False
1
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Audit Reports on Internal Control over Financial Reporting
43. Auditing reporting standards for financial statement and integrated audits require auditors to provide which
of the following?
a.
Positive assurance.
b.
Negative assurance.
c.
Materiality assurance.
d.
No assurance.
1
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Audit Reports on Internal Control over Financial Reporting
Chapter 15 – Audit Reports on Financial Statements
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Audit Reporting Principles
44. Which of the following is a change that is not being debated by auditing standard setters and investors?
a.
Adding disclosure about which engagement partner at the firm supervised the audit and who from
outside the audit firm participated in the audit
b.
Adding commentary on areas of risk of material misstatement of the financial statements identified
by the auditor.
c.
Adding commentary about the level of materiality applied by the auditor to perform the audit.
d.
All of the above are being debated.
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Audit Reporting Principles
45. According to the AICPA, the auditor needs to form an opinion on the financial statements based on an
evaluation of the audit evidence obtained. This is stated in which AICPA principle governing an audit
conducted in accordance with GAAS?
a.
Principle 1
b.
Principle 4
c.
Principle 5
d.
Principle 7
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Audit Reporting Principles
46. According to the AICPA, the auditor needs to clearly express an opinion based on audit evidence obtained
in the form of a written report.This is stated in which AICPA principle governing an audit conducted in
accordance with GAAS?
a.
Principle 1
b.
Principle 4
c.
Principle 5
d.
Principle 7
Chapter 15 – Audit Reports on Financial Statements
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Audit Reporting Principles
47. According to the AICPA principles, which of the following is incorrect?
a.
If the auditor has reservations about the fairness of financial statement presentation, the reason(s)
must be stated in the auditor’s report.
b.
If there is a material departure from GAAP in the financial statements, the auditor should explicitly
state the nature of the departure and the dollar effects where determinable.
c.
Auditors should state the reasons why an unqualified opinion cannot be issued.
d.
Auditors should issue an unqualified opinion in all cases where companies have provided an entire
set of financial statements and footnotes that include all years presented for comparative purposes.
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Audit Reporting Principles
48. Which one of the following is not a type of unqualified audit opinion issued by auditors?
a.
Standard with three paragraphs.
b.
Includes explanatory paragraph.
c.
Includes modifications.
d.
Does not include the opinion paragraph.
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Standard Unqualified Audit Reports
49. Which one of the following is an example of the contents of an opinion paragraph found in an audit report?
a.
“We have audited….”
b.
“Nothing came to our attention…”
c.
“The financial statements referred to above present fairly,…”
d.
“An audit includes examining, on a test basis…”
50. In which one of the following instances would an auditor most likely issue a standard unqualified opinion
without explanatory language?
a.
Management’s disclosures are missing or inadequate.
b.
There is substantial doubt about the entity’s ability to continue as a going concern.
c.
There is a significant limitation on the scope of the engagement.
d.
There is an immaterial deviation from GAAP related to capitalizing repairs.
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Standard Unqualified Audit Reports
51. The division of responsibility between the reporting company’s management and the audit firm is described
in which one of the following?
a.
Scope paragraph.
b.
Introductory paragraph.
c.
Notes to the financial statements.
d.
Opinion paragraph.
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Standard Unqualified Audit Reports
52. If the auditor believes that there is a remote probability that resolution of an uncertainty will have a material
effect on the financial statements, which of the following would the auditor issue?
a.
A disclaimer of opinion.
b.
A standard unqualified opinion.
c.
An adverse opinion.
d.
An unqualified opinion with explanatory paragraphs.
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Standard Unqualified Audit Reports
53. The scope paragraph of an unqualified opinion primarily gives information relating to which of the
following?
a.
The division of responsibilities.
b.
The final assessment of a company’s standings with the audit firm.
c.
The statements and dates under audit.
d.
Audit planning and procedure.
d
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Standard Unqualified Audit Reports
54. Audit reports are designed to promote clear communication between the auditor and the financial statement
user. Which of the following is not delineated in the audit report?
a.
What was audited and the relative responsibilities of the client and the auditor.
b.
The experience level of the audit team.
c.
The nature of the audit opinion formulation process.
d.
The auditor’s opinion on the fairness of the financial statements.
b
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Standard Unqualified Audit Reports
55. If the auditor decides to draw attention to large related party transactions occurring in the financial
statements of the client, which report will most likely be issued?
a.
Qualified.
b.
Unqualified with an explanatory paragraph
c.
Adverse.
d.
Consolidation.
b
1
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Unqualified Audit Reports with Explanatory Language
56. The use of another CPA firm by an audit firm to perform part of the engagement on a client’s subsidiary will
require the audit firm to do which of the following?
Chapter 15 – Audit Reports on Financial Statements
a.
Merge with the other CPA firm.
b.
Perform a peer review on the other CPA firm.
c.
Ensure the independence of the other CPA firm of the client.
d.
List the other firm in the footnotes to the client’s financial statements.
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Unqualified Audit Report with Explanatory Language
57. When financial statements contain a material, unjustified departure from GAAP, which of the following is
contained in the audit report?
a.
A Qualification: Yes; An Explanatory Paragraph After the Opinion Paragraph: No.
b.
A Qualification: Yes; An Explanatory Paragraph After the Opinion Paragraph: Yes.
c.
A Qualification: No; An Explanatory Paragraph After the Opinion Paragraph: Yes.
d.
A Qualification: No; An Explanatory Paragraph After the Opinion Paragraph: No.
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Unqualified Audit Reports with Explanatory Language
58. When the financial statements contain a material departure from GAAP that the auditor believes is justified,
where should the justification appear?
a.
In a footnote.
b.
In a paragraph added before the scope paragraph.
c.
In the opening paragraph.
d.
In a paragraph added before the opinion paragraph.
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Unqualified Audit Reports with Explanatory Language
59. Which one of the following is an instance where the auditor would add a paragraph after the opinion
paragraph?
a.
There is serious doubt that the client can continue as a going concern.
b.
Management’s disclosures are not adequate.
c.
There are significant uncertainties that are not properly disclosed in the footnotes.
Chapter 15 – Audit Reports on Financial Statements
d.
There is a material dollar misstatement in the financial statements.
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Unqualified Audit Reports with Explanatory Language
60. A client company has a history of negative cash flow trends and continuing losses. Which type of opinion
will the auditor most likely issue?
a.
Adverse.
b.
Unqualified with explanatory language.
c.
Qualified.
d.
Disclaimer of opinion.
b
1
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Unqualified Audit Reports with Explanatory Language
61. When the auditor wishes to emphasize a matter in the financial statements, which of the following would the
audit report contain?
a.
A Qualification: Yes; An Explanatory Paragraph After the Opinion Paragraph: No.
b.
A Qualification: Yes; An Explanatory Paragraph After the Opinion Paragraph: Yes.
c.
A Qualification: No; An Explanatory Paragraph After the Opinion Paragraph: Yes.
d.
A Qualification: No; An Explanatory Paragraph After the Opinion Paragraph: No.
1
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Unqualified Audit Reports with Explanatory Language
62. When the auditor is unable to obtain sufficient appropriate evidence because the client did not allow a
procedure to be completed, which of the following would the report most likely contain?
a.
A Qualification: Yes; An Explanatory Paragraph After the Opinion Paragraph: No.
b.
A Qualification: Yes; An Explanatory Paragraph After the Opinion Paragraph: Yes.
c.
A Qualification: No; An Explanatory Paragraph After the Opinion Paragraph: Yes.
d.
A Qualification: No; An Explanatory Paragraph After the Opinion Paragraph: No.
63. In the audit of consolidated financial statements under U.S. auditing standards when more than one CPA
firm is involved and the principal audit firm chooses to mention the other firm(s), the wording of which
paragraph(s) is modified?
a.
Introductory Paragraph: No; Scope Paragraph: No; Opinion Paragraph: Yes.
b.
Introductory Paragraph: No; Scope Paragraph: Yes; Opinion Paragraph: Yes.
c.
Introductory Paragraph: Yes; Scope Paragraph: Yes; Opinion Paragraph: Yes.
d.
Introductory Paragraph: Yes; Scope Paragraph: Yes; Opinion Paragraph: No.
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Unqualified Audit Reports with Explanatory Language
64. Which of the following would not result in an unqualified audit report with an explanatory paragraph?
a.
Going concern issue.
b.
Scope limitation.
c.
Emphasis of a matter.
d.
Consistency of presentation.
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Unqualified Audit Report with Explanatory Language
65. How would the auditor categorize a situation when the financial statements do not contain a footnote the
auditor believes is necessary for fair presentation?
a.
A scope limitation.
b.
An uncertainty.
c.
A departure from GAAP.
d.
An act discreditable.
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Unqualified Audit Reports with Explanatory Language