Chapter 18 – Reports on Audited Financial Statements
45. If a public company issues financial statements that purport to present its financial position
and results of operations but omits the statement of cash flows, the auditor ordinarily will
express a(an)
46. Auditing standards define special purpose financial statements as including those prepared
under the following base(s)
Chapter 18 – Reports on Audited Financial Statements
47. When reporting on comparative financial statements where the financial statements of the
prior year have been examined by a predecessor auditor whose report is not presented, the
successor auditor should make
48. Which of the following would not require an explanatory/emphasis-of-matter paragraph in
the auditor’s report?
Chapter 18 – Reports on Audited Financial Statements
49. When are an auditor’s reporting responsibilities not met by attaching an explanation of the
circumstances and a disclaimer of opinion to the client’s financial statement?
50. A CPA who is not independent and is associated with financial statements should disclaim
an opinion with respect to those financial statements. The disclaimer should
Chapter 18 – Reports on Audited Financial Statements
51. An auditor may reasonably issue an “except for” qualified opinion for
52. The auditor’s best course of action with respect to “other financial information” included in
an annual report containing the auditor’s report is to
Chapter 18 – Reports on Audited Financial Statements
53. When audited financial statements are presented in a document containing other
information, the auditor
54. When audited financial statements are presented in a client’s document containing other
information, the auditor should
Chapter 18 – Reports on Audited Financial Statements
55. What is an auditor’s responsibility for supplementary information, such as segment
information, that is outside the basic financial statements, but required by the FASB?
56. All of the following are true with respect to the auditor’s consideration of information other
than the audited financial statements that are included in a client’s annual report except:
Chapter 18 – Reports on Audited Financial Statements
57. When an auditor reports on financial statements prepared on an entity’s income tax basis,
the auditor’s report should
58. An auditor’s report on financial statements prepared in accordance with a basis of
accounting other than generally accepted accounting principles should include all of the
following except:
Chapter 18 – Reports on Audited Financial Statements
59. Which of the generally accepted auditing standards of reporting would not normally apply
to special reports such as cash basis statements?
60. An engagement to express an opinion on a system of internal control will generally
Chapter 18 – Reports on Audited Financial Statements
61. When expressing an opinion on a specified account or item in the financial statements, the
auditor need only consider that account or item. However, the auditor must have audited the
entire set of financial statements if this engagement requires a report on the entity’s
62. A special report related to compliance with contractual provisions provides
Chapter 18 – Reports on Audited Financial Statements
63. An auditor concludes that there is a material inconsistency in the other information in an
annual report to shareholders containing audited financial statements. If the auditor concludes
that the financial statements do not require revision, but the client refuses to revise or eliminate
the material inconsistency, the auditor may
Chapter 18 – Reports on Audited Financial Statements
64. Cravens was asked to perform the first audit of a wholesale business that does not maintain
perpetual inventory records. Cravens has observed the current inventory but has not observed
the physical inventory at the previous year-end date and concludes that the opening inventory
balance, which is not auditable, is a material factor in the determination of cost of goods sold for
the current year. Cravens will probably
Chapter 18 – Reports on Audited Financial Statements
65. When there has been a change in accounting principle that materially affects the
comparability of the comparative financial statements presented for a public company and the
auditor concurs with the change, the auditor should
Chapter 18 – Reports on Audited Financial Statements
66. In the first audit of a client, because of the client’s record retention policies, an auditor was
not able to gather sufficient evidence about the consistent application of accounting principles
between the current and the prior year, as well as the amounts of assets or liabilities at the
beginning of the current year. If the amounts in question could materially affect current
operating results, the auditor would
67. A scope limitation sufficient to preclude an unqualified opinion always will result when
management
Chapter 18 – Reports on Audited Financial Statements
68. In which of the following situations would an auditor ordinarily choose between expressing
an “except for” qualified opinion and expressing an adverse opinion?
69. In an engagement to express an opinion on one or more specified elements, accounts, or
items of a financial statement, the auditor can generally audit only those specified elements and
not the entire set of financial statements. However, the auditor is required to audit the entire set
of financial statements if the elements specified include
Chapter 18 – Reports on Audited Financial Statements
70. Jeff Johns is a staff accountant and has been assigned to the audit of Worldwide Enterprises,
Inc. Subsequent to the completion of fieldwork, Jeff was assigned to draft the audit report. The
content of one of the paragraphs he has drafted reads as follows:
As explained in Note 2 to the financial statements, Worldwide Enterprises has charged
goodwill and certain other intangible assets acquired in two separate acquisitions directly to
shareholders’ equity. Under generally accepted accounting principles, these intangibles should
have been recorded as assets and amortized to income over future periods. Had these
intangibles been capitalized, total assets would have increased by $400,000 as of December 31,
2011 and net income and earnings per share would be increased by $380,000 and $2.25,
respectively (assuming a 20-year amortization period).
Chapter 18 – Reports on Audited Financial Statements
71. The following four situations require a modification to the standard unqualified/unmodified
audit report. Identify the modification required for each.
Chapter 18 – Reports on Audited Financial Statements
72. Changes in a client’s accounting choices either affect “consistency” in the application of
GAAP or they do not. For each item listed below, state whether the item affects consistency and
identify the effect the change will have on the audit report.
1. Change in accounting estimate.
2. Correction of an error in principle.
3. Change in reporting entity.
4. Correction of an error that does not involve an accounting principle.
5. Change in accounting principle.
6. Change in classification and reclassification.
7. Change expected to have a material future effect.
Chapter 18 – Reports on Audited Financial Statements
73. For each of the following situations, indicate what type of audit report is most appropriate.
a. The auditor lacks independence in fact, but not necessarily in appearance.
b. There is a scope limitation and it is material but the overall financial statements are still
presented fairly.
c. The uncorrected misstatements are immaterial.
d. There is a departure from GAAP and it is pervasively material.
Chapter 18 – Reports on Audited Financial Statements
74. Identify the special purpose framework used in each of the following situations.
1. A real estate company reports to its partners on the basis used to complete the income tax
return.
2. A company has its financial statements prepared on a price-level adjusted basis as required
by its lender.
3. An insurance company reports in compliance with the rules of a state insurance commission.
4. A partnership reports on revenues received and expenses paid.
What modifications must be made to the standard auditor’s report for these situations?
Chapter 18 – Reports on Audited Financial Statements
75. Discuss the conditions that prohibit the auditor from issuing an unqualified/unmodified
opinion and the types of reports that the auditor may issue for a financial statement audit.
There are three circumstances that may require a departure from an unqualified/unmodified
audit report: