4) The auditor’s report of the Samcorp Company indicates that the auditor is unable to form an
opinion on whether the financial statements of the company are fairly presented due to scope
restrictions and unavailable and incomplete records. The auditor’s report is
A) unqualified.
B) qualified.
C) adverse.
D) disclaimer of opinion.
5) The least severe type of report for disclosing departures from an unqualified report is the
A) adverse opinion.
B) disclaimer of opinion.
C) qualified opinion.
D) report on unaudited financial statements.
6) When the auditor knows that the financial statements may be misleading because they were
not prepared in accordance with an acceptable financial reporting framework, he or she must
issue
A) a qualified opinion.
B) an adverse opinion.
C) a disclaimer of opinion.
D) a qualified or an adverse opinion, depending on the materiality of the item in question.
7) Whenever the client imposes restrictions on the scope of the audit, the auditor should be
concerned about the possibility that management is trying to prevent discovery of misstated
information. In such cases, which type of report should be issued? 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.
8) The auditor would most likely issue a disclaimer of opinion because of
A) the client’s failure to present supplementary information.
B) inadequate disclosure of material information.
C) a client-imposed scope limitation.
D) the qualification of an opinion by the other auditor of a subsidiary where there is a division of
responsibility.
9) A misstatement in the financial statements can be considered material if
A) it overshadows the financial statements as a whole.
B) knowledge of the misstatement would affect the decision of a reasonable user of the
statements.
C) it affects more than one account on the statements.
D) it affects only one account on the statements.
10) When a misstatement in the financial statements exists but is unlikely to affect the decisions
of a reasonable user, it would be appropriate to issue
A) an unqualified opinion.
B) a qualified opinion.
C) a disclaimer of opinion.
D) an adverse opinion.
11) 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 will be found to be misleading or misstated, if an adequate
investigation is performed.
C) the overall financial statements are so materially misstated or misleading as a whole that they
do not present fairly the financial position or results of operations and changes in financial
position.
D) the audit firm is not independent.
12) Both disclaimers of opinion and adverse opinions are used
A) only when the condition is highly material and pervasive.
B) whether the condition is material or not.
C) regardless of the auditor’s independence.
D) regardless of the client’s choice of accounting method.
13) Mafah Distribution Limited has requested that the audited financial statements be completed
by January 5, five days after the December 31 year end. This means that the auditor will be
unable to verify subsequent payments on accounts receivable and will be unable to determine
whether accounts payable have been set up correctly. What type of audit report should Mafah
receive if the auditor is unable to use alternative procedures for these two audit areas?
A) Disclaimer
B) Adverse
C) Qualified
D) Unqualified
14) The dollar amount of some misstatements cannot be accurately measured. If, for example,
the client was unwilling to disclose an existing lawsuit, the materiality question the auditor must
evaluate in such a situation is
A) what effect will it have on net income.
B) how will it affect management’s future decisions.
C) does it increase the auditor’s exposure to lawsuits.
D) what effect will it have on statement users.
15) When a misstatement in the financial statements would affect a user’s decision but the overall
statements are still fairly stated, it would be appropriate to issue
A) an unqualified opinion.
B) a qualified opinion.
C) an adverse opinion.
D) a disclaimer of opinion.
16) The client has presented all required financial statements with the exception of the statement
of cash flows. The auditor has completed the audit and is satisfied that everything, with the
exception of the missing statement, is presented fairly. As a result, the auditor would likely issue
A) a qualified opinion.
B) an unqualified opinion.
C) a disclaimer of opinion.
D) either an unqualified or qualified opinion.
17) If inventory is the largest balance on the financial statements, a large misstatement would be
so material that the auditor should issue
A) an unqualified opinion.
B) a qualified opinion.
C) an adverse opinion.
D) a disclaimer of opinion.
18) When determining whether an exception is highly material, the extent to which the exception
affects different parts of the financial statements must be considered. This is referred to as
A) materiality.
B) pervasiveness.
C) financial analysis.
D) ratio analysis.
19) Fractal Software Limited has acquired a 100% subsidiary in Malaysia that produces
keyboards and other types of computer hardware. Fractal is refusing to consolidate its financial
statements, as this would increase the debt to equity ratio to the point that Fractal would violate
its debt agreement, although it would benefit the current ratio with a sizeable increase in
inventory. Instead, Fractal would like to record the investment in the Malaysian subsidiary at
cost. What type of effect does the non-consolidation have upon the financial statements?
A) Material and isolated
B) Material
C) Material and pervasive
D) Immaterial
20) The primary concern in measuring materiality when a client has failed to follow an
acceptable financial reporting framework is usually
A) the total dollar error in the accounts involved, compared with some acceptable base.
B) measurability of the dollar error.
C) the nature of the item in error.
D) whether it can materially affect some future period.
21) The auditor has set materiality at XYZ Company of $50,000 based upon a percentage of net
assets. The company currently has a small profit (only $3,500). Which of the following items
would the auditor most likely consider to be material and request an account balance adjustment?
A) a misclassification between accounts receivable and accounts payable of $10,000
B) incorrect allocation of a note payable to current rather than long term
C) poor wording in a note to the financial statements, making it a bit difficult to understand
D) an understatement of depreciation expense, which would increase depreciation by $5,000
22) Dussault & Montgomery, the auditors of Greenwich Corp., relied on Groves & Padden,
another PA firm, to audit the Quebec subsidiaries of Greenwich. The responsibility for the
opinion to issue on the financial statements is the responsibility of
A) Greenwich Corp.
B) Dussault & Montgomery.
C) Groves & Padden.
D) Dussault & Montgomery and Groves & Padden.
23) When Dussault & Montgomery relied on Groves & Padden, another PA firm, to audit the
Quebec subsidiaries of one of their audit client, Dussault & Montgomery should
A) assess Groves & Padden’s professional qualifications.
B) ask Groves & Padden to also sign the auditor’s report.
C) send one of their auditors to Quebec to supervise the work being done by Groves & Padden.
D) issue a qualified opinion for the financial information pertaining to the Quebec subsidiaries.
24) The primary auditor who relies on a secondary auditor
A) is responsible for any deficiencies in the secondary auditor’s work.
B) will mention the name of the secondary auditor if he or she decides that an unqualified
opinion is appropriate.
C) will never mention the name of the secondary auditor in his or her report even if the report is
qualified.
D) has no responsibility for checking the work of the secondary auditor.
25) There are two conditions requiring a departure from an unqualified audit report. Discuss each
of these conditions and state the appropriate audit report for each condition.
26) Discuss how materiality affects audit reporting decisions.
27) The following are two unrelated situations. For each situation outline possible deviations (if
any) from a standard auditor’s report that may be necessary, and give reasons. State your
assumptions.
A) Queen Lake Construction Ltd. uses an aggressive revenue recognition policy under the
percentage of completion method for long-term construction contracts. Your review of this year’s
contracts indicates that several projects look as if they will be high in revenue for the first two
years, and then have negligible earnings for the next three years.
B) Maple Manufacturing Limited constructs furniture out of maple wood. The furniture is prized
for its durability and craftsmanship. Last year, the company received a letter from a
governmental agency advising that it had been found that the factory was located on
contaminated land that leached hazardous chemicals into the air. This was a preliminary letter
stating that a full investigation into the health effects was underway. Management stated that
everything is OK – the investigation was terminated. However, the lawyer refused to sign the
legal letter with respect to several lawsuits with respect to employee claims for long term
disability due to a nervous disorder that affected employees’ ability to work. Neither the
investigation nor the lawsuits are disclosed in the notes to the financial statements.
28) The following are two unrelated situations. For each situation outline possible deviations (if
any) from a standard auditor’s report that may be necessary, and give reasons. State your
assumptions.
A) Rosebud Ltd. is a construction company that builds and repairs greenhouses for nurseries. An
architect does the design, and three different small construction companies are used to build the
greenhouses. You are concerned that some of the projects that span the April year end may result
in material losses, even though income has been reported in the coming year. Management has
refused permission for you to enter construction sites, as they feel that the construction sites will
be dangerous and they do not want to be exposed to such liability.
B) Save our Trees is a charitable organization devoted to maintaining national woodland and
green space. Fund raising is handled primarily by means of electronic mail and door to door
canvassing by volunteers. Volunteers conducting canvassing provide receipts at the door using
prenumbered receipts. Funds raised by email are sent receipts by email.
29) The following are two unrelated situations. For each situation outline possible deviations (if
any) from a standard auditor’s report that may be necessary, and give reasons. State your
assumptions.
A) During 2012, your client was sued by a customer who had a serious car accident as a result of
scrap metal that had been dumped in the parking lot. The customer drove over the scrap metal,
which was imbedded in the tires of her vehicle. The tires blew, and the car went out of control on
a major highway. The amount in dispute is $400,000, with estimated legal bills of about $20,000.
The client does not wish to disclose the suit in the financial statements.
B) During the current year, your client leased a large amount of equipment. As the lease qualifies
as a capital lease, the equipment has been recorded as an asset, with the corresponding liabilities
recorded on the financial statements. The implicit interest rate in the lease is seven percent. The
annual payments due over the terms of the lease have been disclosed in the notes to the financial
statements.
30) Your client, Huge Telephone Company (HTC), has encountered troubled times, due to
deregulation. There is competition for local telephone business and long distance telephone
business. The high speed lines for internet access provided via the telephone network have not
been selling as well as expected. A new quirk is that many large cities are going to provide free
wireless services by installing wireless transmitters on telephone poles, and is only offering to
pay a pittance for the use of the telephone poles. HTC has been able to retain reasonable profits
by cutting staff to a bare minimum and outsourcing many services.
However, due to several labour contracts and federal legislation that will increase services, you
have doubts about the ability of the company to renew a major bond issue this coming year.
Required:
How does the above information affect the audit report?
31) Julia is in the process of auditing the legal liability section of the financial statements. The
controller indicated that he did not want her to contact their external lawyers and he is refusing to
grant her access to the detail of the legal expense for the year and any legal invoices.
What should Julia do in this situation? Indicate the steps, in the proper order, that should be
taken.