Chapter 14 Audit Reports

Audit Reports
MULTIPLE CHOICE:
1. An auditor would issue an adverse opinion if
a. The audit was begun by other independent auditors who
withdrew from the engagement.
b. A qualified opinion cannot be given because the
auditor lacks independence.
c. The restriction on the scope of the audit was
significant.
d. The statements taken as a whole do not fairly present
the financial condition and results of operations of
the company.
ANSW!" #
$. An audit report contains the following paragraph" %&ecause
of the inadequacies in the company's accounting records
during the year ended (une )*+ $**)+ it was not practicable
to e,tend our auditing procedures to the e,tent necessary to
enable us to obtain certain evidential matter as it relates
to classification of certain items in the consolidated
statements of operations.% This paragraph most likely
describes
a. A material departure from -AA. requiring a qualified
audit opinion.
b. An uncertainty that should not lead to a qualified
opinion.
c. A matter that the auditor wishes to emphasi/e and that
does not lead to a qualified audit opinion.
d. A material scope restriction requiring a qualification
of the audit opinion.
ANSW!" #
). A limitation on the scope of the auditor's e,amination
sufficient to preclude an unqualified opinion will always
result when management
a. Asks the auditor to report on the balance sheet and
not on the other basic financial statements.
b. !efuses to permit its lawyer to respond to the letter
of audit inquiry.
c. #iscloses material related party transactions in the
footnotes to the financial statements.
d. 0nows that confirmation of accounts receivable is not
feasible.

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Chapter 14 Audit Reports
ANSW!" &
1. The auditor issued a qualified opinion covering the
financial statements of 2lient A for the year ended #ecember
)1+ $**$. The reason for the qualification was a departure
from -AA.. 3n presenting comparative statements for the
years ended #ecember )1+ $**$ nd $**)+ the client revised
the $**$ financial statements to correct the previous
departure from -AA.. The auditor's $**) report on the
1$4)14*$ and 1$4)14*) comparative financial statements will
a. ,press a qualified opinion on the $**$ financial
statements and an unqualified opinion on the $**)
statements.
b. ,press unqualified opinions on both the $**$ and $**)
financial statements.
c. !etain the qualified opinion covering the $**$
statements+ but add an e,planatory paragraph describing
the correction of the prior departure from -AA..
d. !ender qualified audit opinions for both $**$ and $**)
financial statements given the $**) carryover effect of
the $**$ error.
ANSW!" &
5. When financial statements are presented that are not in
conformity with generally accepted accounting principles+ an
auditor may issue a6an7
%,cept for% #isclaimer
opinion of an opinion
a. 8es No
b. 8es 8es
c. No 8es
d. No No
ANSW!" A
9. :nder which of the following circumstances would a
disclaimer of opinion not be appropriate;
a. The auditor is engaged after fiscal year<end and is
unable to observe physical inventories or apply
alternative procedures to verify their balances.
b. The auditor is unable to determine the amounts
associated with illegal acts committed by the client's
management.
c. The financial statements fail to contain adequate
disclosure concerning related party transactions.
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Chapter 14 Audit Reports
d. The client refuses to permit its attorney to furnish
information requested in a letter of audit inquiry.
ANSW!" 2
=. An auditor may reasonably issue an %e,cept for% qualified
opinion for
3nadequate Scope
disclosure limitation
a. 8es 8es
b. 8es No
c. No 8es
d. No No
ANSW!" A
>. An auditor's report would be designated as a special report
when it is issued in connection with financial statements
that are
a. ?or an interim period and are sub@ected to a limited
review.
b. :naudited and are prepared from a client's accounting
records.
c. .repared in accordance with a comprehensive basis of
accounting other than generally accepted accounting
principles.
d. .urported to be in accordance with generally accepted
accounting principles but do not include a presentation
of the Statement of 2ash ?lows.
ANSW!" 2
A. A limitation on the scope of an auditor's e,amination
sufficient to preclude an unqualified opinion will usually
result when management
a. .resents financial statements that are prepared in
accordance with the cash receipts and disbursements
basis of accounting.
b. States that the financial statements are not intended
to be presented in conformity with generally accepted
accounting principles.
c. #oes not make the minutes of the &oard of #irectors'
meetings available to the auditor.
d. Asks the auditor to report on the balance sheet and
not on the other basic financial statements.
ANSW!" 2

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Chapter 14 Audit Reports
1*. When there is a significant change in accounting principle+
an auditor's report should refer to the lack of consistency
in
a. The scope paragraph.
b. An e,planatory paragraph between the second paragraph
and the opinion paragraph.
c. The opinion paragraph.
d. An e,planatory paragraph following the opinion
paragraph.
ANSW!" #
11. Which of the following subsequent events will be least
likely to result in an ad@ustment to the financial
statements;
a. 2ulmination of events affecting the reali/ation value
of accounts receivable owned as of the balance sheet
date.
b. 2ulmination of events affecting the reali/ation of
inventories owned as of the balance sheet date.
c. Baterial changes in the settlement of liabilities which
were estimated as of the balance sheet date.
d. Baterial changes in the quoted market prices of listed
investment securities since the balance sheet date.
ANSW!" #
1$. Soon after &oyd's audit report was issued+ &oyd learned of
certain related party transactions that occurred during the
year under audit. These transactions were not disclosed in
the notes to the financial statements. &oyd should
a. .lan to audit the transactions during the ne,t
engagement.
b. !ecall all copies of the audited financial statements.
c. #etermine whether the lack of disclosure would affect
the auditor's report.
d. Ask the client to disclose the transactions in
subsequent interim statements.
ANSW!" 2
1). :nder which of the following circumstances would a
disclaimer of opinion not be appropriate;
a. The financial statements fail to contain adequate
disclosure concerning related party transactions.
b. The client refuses to permit its attorney to furnish
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Chapter 14 Audit Reports
information requested in a letter of audit inquiry.
c. The auditor is engaged after fiscal year<end and is
unable to observe physical inventories or apply
alternative procedures to verify their balances.
d. The auditor is unable to determine the amounts
associated with illegal acts committed by the client's
management.
ANSW!" A
11. An auditor concludes that there is substantial doubt about
an entity's ability to continue as a going concern for a
reasonable period of time. 3f the entity's disclosures
concerning this matter are adequate+ the audit report may
include a6an7
#isclaimer %,cept for%
of opinion qualified opinion
a. 8es 8es
b. No No
c. No 8es
d. 8es No
ANSW!" #
15. Banagement of &lue 2ompany has decided not to account for a
material transaction in accordance with the provisions of an
?AS& Standard. 3n setting forth its reasons in a note to
the financial statements+ management has clearly
demonstrated that due to unusual circumstances the
financial statements presented in accordance with the ?AS&
Standard would be misleading. The auditor's report should
include an e,planatory separate paragraph and contain a6an7
a. Adverse opinion.
b. :nqualified opinion.
c. %,cept for% qualified opinion.
d. %Sub@ect to% qualified opinion.
ANSW!" &
19. 3n the %management discussion and analysis% contained in the
$**$ annual report of #ermicile 2orporation+ management
stated that total sales were C1.A5 billion and net profit
was C5** million. The audited sales and net profit+
however+ were C).> billion and C15* million respectively.
The financial statements+ contained in the annual report+
reflected the audited figures and the 2.A planned to issue
an unqualified opinion. :pon noting the inconsistencies

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Chapter 14 Audit Reports
between the B#DA and the audited financial statements+
however+ the 2.A should
a. !efer to the inconsistency in the audit report and
issue a qualified audit opinion.
b. 3ssue an unqualified opinion without an e,planatory
paragraph+ because the B#DA is not covered in the audit
report.
c. 3ssue an unqualified audit opinion with an e,planatory
paragraph describing the inconsistency.
d. !ender an adverse opinion on the basis that management
had intentionally misrepresented reported sales and net
profit.
ANSW!" 2
1=. When the audited financial statements of the prior year are
presented together with those of the current year+ the
continuing auditor's report should cover
a. &oth years.
b. Enly the current year.
c. Enly the current year+ but the prior year's report
should be presented.
d. Enly the current year+ but the prior year's report
should be referred to.
ANSW!" A
1>. 3f the auditor believes that financial statements which are
prepared on a comprehensive basis of accounting other than
generally accepted accounting principles are not suitably
titled+ the auditor should
a. Bodify the auditor's report to disclose any
reservations.
b. 2onsider the effects of the titles on the financial
statements taken as a whole.
c. 3ssue a disclaimer of opinion.
d. Add a footnote to the financial statements which
e,plains alternative terminology.
ANSW!" A
1A. Borgan+ 2.A+ is the principal auditor for a multi<national
corporation. Another 2.A has e,amined and reported on the
financial statements of a significant subsidiary of the
corporation. Borgan is satisfied with the independence and
professional reputation of the other auditor+ as well as the
quality of the other auditor's e,amination. With respect to
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Chapter 14 Audit Reports
Borgan's report on the consolidated financial statements+
taken as a whole+ Borgan
a. Bust not refer to the e,amination of the other auditor.
b. Bust refer to the e,amination of the other auditor.
c. Bay refer to the e,amination of the other auditor.
d. Bay refer to the e,amination of the other auditor+ in
which case Borgan must include in the auditor's report
on the consolidated financial statements a qualified
opinion with respect to the e,amination of the
other auditor.
ANSW!" 2
$*. A post<audit review+ conducted by another audit partner+
discovered that the audit team had failed to e,amine or
confirm securities held in safekeeping. The amounts
involved were material in relation to reported net assets.
The unqualified audit report+ along with the audited
financial statements+ had been released two months earlier.
&ased on this information+ the audit team should
a. !equest the client for permission to e,amine or confirm
the securities.
b. Notify persons known to be relying on the audit report
that the report can no longer be relied upon.
c. #raft a revised audit report containing an opinion
qualified for a scope restriction.
d. 3gnore the finding inasmuch as the financial statements
and audit report have already been released.
ANSW!" A
$1. The auditor's report should be dated as of the date on which
the
a. !eport is delivered to the client.
b. ?ield work is completed.
c. ?iscal period under audit ends.
d. !eview of the working papers is complete.
ANSW!" &
$$. After issuing the audit report+ the auditor may become aware
of information that would have affected the audit report had
it been known at the time. -iven discovery of such
information+ the auditor must take appropriate action. Which
of the following actions would be considered inappropriate
under these circumstances;

237
Chapter 14 Audit Reports
a. #etermine whether the information is reliable and
whether the facts e,isted at the date of the audit
report.
b. !equest the client to disclose+ to financial statement
users+ the newly discovered facts and their impact on
the financial statements.
c. 3f the client refuses to inform third parties+ the
auditor should notify the board of directors and
regulatory agencies having @urisdiction over the client
that the auditors' report can no longer be relied upon.
d. #raft a revised audit report e,pressing a qualified or
adverse opinion+ depending on the materiality of the
effect+ and transmit the report to the stockholders.
ANSW!" #
$). Which of the following best describes the auditor's
responsibility for %other information% included in the
annual report to stockholders which contains financial
statements and the auditor's report;
a. The auditor has no obligation to read the %other
information.%
b. The auditor has no obligation to corroborate the
%other information+% but should read the %other
information% to determine whether it is materially
inconsistent with the financial statements.
c. The auditor should e,tend the e,amination to the
e,tent necessary to verify the %other information.%
d. The auditor must modify the auditor's report to state
that the %other information is unaudited% or %not
covered by the auditor's report.%
ANSW!" &
$1. When an auditor conducts an e,amination in accordance with
generally accepted auditing standards and concludes that the
financial statements are fairly presented in accordance with
a comprehensive basis of accounting other than generally
accepted accounting principles such as the cash basis of
accounting+ the auditor should issue a
a. #isclaimer of opinion.
b. !eview report.
c. Fualified opinion.
d. Special report.
ANSW!" #
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Chapter 14 Audit Reports
$5. 3n which of the following circumstances would an auditor be
most likely to e,press an adverse opinion;
a. The statements are not in conformity with the ?AS&
Statements regarding the capitali/ation of leases.
b. 3nformation comes to the auditor's attention that
raises substantial doubt about the entity's ability to
continue in e,istence.
c. The chief e,ecutive officer refuses the auditor access
to minutes of board of directors' meetings.
d. 2ontrol tests show that the entity's internal control
is so poor that the financial records cannot be
relied upon.
ANSW!" A
$9. :nder which of the following circumstances would an
unqualified audit opinion+ followed by an e,planatory
paragraph+ not be appropriate;
a. The auditor wishes to emphasi/e that the client has
entered into material transactions with related
parties. The substance of the related party
transactions is properly disclosed in the
audited
financial statements.
b. The client has completed material transactions with
related parties and the auditor is unable to
persuade management to properly reflect the economic
substance of the transactions in the financial
statements.
c. The client has used a method of revenue recognition
that is at variance with promulgated accounting
standards. The auditor+ however+ agrees with
the departure on the basis that use of the promulgated
standard would make the financial statements
materially misleading.
d. The auditor believes that substantial doubt e,ists
concerning the ability of the client to continue
as a going concern.
ANSW!" &
$=. #oe+ an independent auditor+ was engaged to perform an
e,amination of the financial statements of Ally 3ncorporated
one month after its fiscal year had ended. Although the
inventory count was not observed by #oe+ and accounts
receivable were not confirmed by direct communication with
debtors+ #oe was able to gain satisfaction by applying

239
Chapter 14 Audit Reports
alternative auditing procedures. #oe's auditor's report
will probably contain
a. A standard unqualified opinion.
b. An unqualified opinion and an e,planatory middle
paragraph.
c. ither a qualified opinion or a disclaimer of opinion.
d. An %e,cept for% qualification.
ANSW!" A
$>. The adverse effects of events causing an auditor to believe
there is substantial doubt about an entity's ability to
continue as a going concern would most likely be mitigated
by evidence relating to the
a. Ability to e,pand operations into new product lines in
the future.
b. ?easibility of plans to purchase leased equipment at
less than market value.
c. Barketability of assets that management plans to sell.
d. 2ommitted arrangements to convert preferred stock to
long<term debt.
ANSW!" 2
$A. 2omparative financial statements include the financial
statements of a prior period which were e,amined by a
predecessor auditor whose report is not presented. 3f the
predecessor auditor's report was qualified+ the successor
auditor must
a. Ebtain written approval from the predecessor auditor to
include the prior year's financial statements.
b. 3ssue a standard comparative audit report indicating
the division of responsibility.
c. ,press an opinion on the current year statements alone
and make no reference to the prior year statements.
d. #isclose the reasons for any qualification in the
predecessor auditor's opinion.
ANSW!" #
30. When reporting on financial statements prepared on a
comprehensive basis of accounting other than generally
accepted accounting principles+ the independent auditor
should include in the report a paragraph that
a. States that the financial statements are not intended
to be in conformity with generally accepted accounting
principles.
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Chapter 14 Audit Reports
b. States that the financial statements are not intended
to have been e,amined in accordance with generally
accepted auditing standards.
c. !efers to the authoritative pronouncements that e,plain
the comprehensive basis of accounting being used.
d. (ustifies the comprehensive basis of accounting being
used.
ANSW!" A
)1. After an audit report containing an unqualified opinion on a
non<public client's financial statements was issued+ the
client decided to sell the shares of a subsidiary that
accounts for )*G of its revenue and $5G of its net income.
The auditor should
a. #etermine whether the information is reliable and+ if
determined to be reliable+ request that revised
financial statements be issued.
b. Notify the entity that the auditor's report may no
longer be associated with the financial statements.
c. #escribe the effects of this subsequently discovered
information in a communication with persons known to be
relying on the financial statements.
d. Take no action because the auditor has no obligation
to make any further inquiries.
ANSW!" #
)$. An audit report contained the following wording" %3n our
opinion+ e,cept for the omission of the segment information
referred to in the preceding paragraph...% This e,cerpt was
taken from a6n7
a. :nqualified audit opinion with an e,planatory paragraph
added to emphasi/e a matter.
b. :nqualified audit opinion with an e,planatory paragraph
added to describe a material uncertainty.
c. Audit opinion qualified due to a departure from -AA..
d. Adverse audit opinion.
ANSW!" 2
)). An auditor includes a separate paragraph in an otherwise
unqualified report to emphasi/e that the entity being
reported upon had significant transactions with related
parties. The inclusion of this separate paragraph
a. Hiolates generally accepted auditing standards if this
information is already disclosed in footnotes to the
financial statements.

241
Chapter 14 Audit Reports
b. Necessitates a revision of the opinion paragraph to
include the phrase %with the foregoing e,planation.%
c. 3s appropriate and would not negate the unqualified
opinion.
d. 3s considered an %e,cept for% qualification of the
report.
ANSW!" 2
)1. An audit report contains the following paragraph" %Since
the company did not take physical inventories and we were
not able to apply auditing procedures to satisfy ourselves
as to inventory quantities and the cost of property and
equipment+ the scope of our work was not sufficient to
enable us to e,press+ and we do not e,press+ an opinion on
these financial statements.% This paragraph illustrates
a6n7
a. #isclaimer of opinion due to uncertainty.
b. #isclaimer of opinion due to scope restrictions.
c. Adverse audit opinion.
d. Audit opinion qualified for material scope
restrictions.
ANSW!" &
)5. An auditor's e,amination reveals a misstatement in segment
information that is material in relation to the financial
statements taken as a whole. 3f the client refuses to make
modifications to the presentation of segment information+
the auditor should issue a6n7
a. %,cept for% opinion.
b. Adverse opinion.
c. :nqualified opinion.
d. #isclaimer of opinion.
ANSW!" A
)9. An auditor's report on financial statements that are
prepared in accordance with a comprehensive basis of
accounting other than generally accepted accounting
principles should preferably include all of the following+
e,cept
a. #isclosure of the fact that the financial statements
are not intended to be presented in conformity with
generally accepted accounting principles.
b. An opinion as to whether the use of the disclosed
method is appropriate.
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Chapter 14 Audit Reports
c. An opinion as to whether the financial statements are
presented fairly in conformity with the basis of
accounting described.
d. A description of a change in accounting principles.
ANSW!" &
)=. When the financial statements are prepared on the going
concern basis but the auditor concludes there is substantial
doubt whether the client can continue in e,istence and also
believes there are uncertainties about the recoverability of
recorded asset amounts on the financial statements+ the
auditor may issue a6an7
a. Adverse opinion.
b. %,cept for% qualified opinion for scope limitation.
c. %,cept for% qualified opinion for departure from -AA..
d. :nqualified opinion with an e,planatory separate
paragraph.
ANSW!" #
)>. 2lient A reports property+ plant+ and equipment at appraisal
values and records depreciation based on the appraised
amounts. Also+ the company does not defer income ta,es for
temporary differences arising from using the installment
method of recogni/ing gross profit for ta, purposes. The
company uses the accrual method for financial reporting
purposes. :nder these circumstances+ the auditor will
probably issue a6n7
a. Audit opinion qualified for a departure from -AA..
b. Adverse audit opinion.
c. #isclaimer of opinion.
d. :nqualified audit opinion with an e,planatory paragraph
describing the client's unique accounting practices.
ANSW!" &
39. A 2.A engaged to e,amine financial statements observes that
the accounting for a certain material item is not in
conformity with generally accepted accounting principles+
and that this fact is prominently disclosed in a footnote to
the financial statements. The 2.A should
a. ,press an unqualified opinion and insert a middle
paragraph emphasi/ing the matter by reference to the
footnote.
b. #isclaim an opinion.
c. Not allow the accounting treatment for this item to

243
Chapter 14 Audit Reports
affect the type of opinion because the deviation from
generally accepted accounting principles was disclosed.
d. Fualify the opinion because of the deviation from
generally accepted accounting principles.
ANSW!" #
1*. When a principal auditor decides to make reference to
another auditor's e,amination+ the principal auditor's
report should always indicate clearly+ in the introductory+
scope+ and opinion paragraphs+ the
a. Bagnitude of the portion of the financial statements
e,amined by the other auditor.
b. #isclaimer of responsibility concerning the portion of
the financial statements e,amined by the other auditor.
c. Name of the other auditor.
d. #ivision of responsibility.
ANSW!" #
41. An auditor may issue a qualified opinion under which of the
following circumstances;
Iack of sufficient !estrictions on the
competent scope of the
evidential matter audit
a. 8es 8es
b. 8es No
c. No 8es
d. No No
ANSW!" A
1$. 3n which of the following circumstances may the auditor
issue the standard audit report;
a. The principal auditor assumes responsibility for the
work of another auditor.
b. The financial statements are affected by a departure
from a generally accepted accounting principle.
c. Substantial doubt e,ists concerning the ability of the
entity to continue as a going concern.
d. The auditor wishes to emphasi/e a matter regarding
the financial statements.
ANSW!" A
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Chapter 14 Audit Reports
1). #oes the auditor make the following representations
e,plicitly or implicitly when issuing the standard auditor's
report on comparative financial statements;
2onsistent ,amination of
application of evidence on a
accounting principles test basis
a. ,plicitly ,plicitly
b. 3mplicitly 3mplicitly
c. 3mplicitly ,plicitly
d. ,plicitly 3mplicitly
ANSW!" 2
11. When there is a significant change in accounting principle+
an auditor's report should refer to the lack of consistency
in
a. The scope paragraph.
b. An e,planatory paragraph between the second paragraph
and the opinion paragraph.
c. The opinion paragraph.
d. An e,planatory paragraph following the opinion
paragraph.
ANSW!" #
15. 3n which of the following situations would an auditor
ordinarily issue an unqualified audit opinion without an
e,planatory paragraph;
a. The auditor wishes to emphasi/e that the entity had
significant related party transactions.
b. The auditor decides to make reference to the report of
another auditor as a basis+ in part+ for the auditor's
opinion.
c. The entity issues financial statements that present
financial position and results of operations+ but omits
the statement of cash flows.
d. The auditor has substantial doubt about the entity's
ability to continue as a going concern+ but the
circumstances are fully disclosed in the financial
statements.
ANSW!" &
19. Jow are management's responsibility and the auditor's
responsibility represented in the standard auditor's report;

245
Chapter 14 Audit Reports
Banagement's Auditor's
responsibility responsibility
a. ,plicitly ,plicitly
b. 3mplicitly 3mplicitly
c. 3mplicitly ,plicitly
d. ,plicitly 3mplicitly
ANSW!" A
1=. An auditor should disclose the substantive reasons for
e,pressing an adverse opinion in an e,planatory paragraph
a. .receding the scope paragraph.
b. .receding the opinion paragraph.
c. ?ollowing the opinion paragraph.
d. Within the notes to the financial statements.
ANSW!" &
1>. When the financial statements contain a departure from
generally accepted accounting principles+ the effect of
which is material+ the auditor should
a. Fualify the opinion and e,plain the effect of the
departure from generally accepted accounting principles
in a separate paragraph.
b. Fualify the opinion and describe the departure from
generally accepted accounting principles within the
opinion paragraph.
c. #isclaim an opinion and e,plain the effect of the
departure from generally accepted accounting principles
in a separate paragraph.
d. #isclaim an opinion and describe the departure from
generally accepted accounting principles within the
opinion paragraph.
ANSW!" A
1A. Tread 2orp. accounts for the effect of a material accounting
change prospectively when the inclusion of the cumulative
effect of the change is required in the current year. The
auditor would choose between e,pressing a6an7
a. Fualified opinion or a disclaimer of opinion.
b. #isclaimer of opinion or an unqualified opinion with an
e,planatory paragraph.
c. :nqualified opinion with an e,planatory paragraph and
an adverse opinion.
d. Adverse opinion and a qualified opinion.
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Chapter 14 Audit Reports
ANSW!" #
5*. The Securities and ,change 2ommission has authority to
a. .rescribe specific auditing procedures to detect fraud
concerning inventories and accounts receivable of
companies engaged in interstate commerce.
b. #eny lack of privity as a defense in third<party
actions for gross negligence against the auditors
of
public companies.
c. #etermine accounting principles for the purpose of
financial reporting by companies offering securities to
the public.
d. !equire a change of auditors of governmental entities
after a given period of years as a means of ensuring
auditor independence.
ANSW!" 2
51. An auditor has previously e,pressed a qualified opinion on
the financial statements of a prior period because of a
departure from generally accepted accounting principles.
The prior<period financial statements are restated in the
current period to conform with generally accepted accounting
principles. The auditor's updated report on the prior<
period financial statements should
a. ,press an unqualified opinion concerning the restated
financial statements.
b. &e accompanied by the original auditor's report on the
prior period.
c. &ear the same date as the original auditor's report on
the prior period.
d. Fualify the opinion concerning the restated financial
statements because of a change in accounting
principle.
ANSW!" A
5$. An auditor's report includes the following statement" %The
financial statements do not present fairly the financial
position+ results of operations+ or cash flows in conformity
with generally accepted accounting principles.% This
auditor's report was most likely issued in connection with
financial statements that are

247
Chapter 14 Audit Reports
a. 3nconsistent.
b. .repared in accordance with another comprehensive basis
of accounting.
c. Bisleading
d. Affected by a material uncertainty.
ANSW!" 2
5). An auditor who qualifies an opinion because of an
insufficiency of evidential matter should describe the
limitation in an e,planatory paragraph. The auditor should
also refer to the limitation in the
Scope Epinion Notes to the
paragraph paragraph financial
statements
a. 8es No 8es
b. No 8es No
c. 8es 8es No
d. 8es 8es 8es
ANSW!" 2
51. !estrictions imposed by a client prohibit the observation of
physical inventories+ which account for )5G of all assets.
Alternative audit procedures cannot be applied+ although the
auditor was able to e,amine satisfactory evidence for all
other items in the financial statements. The auditor should
issue a6an7
a. %,cept for% qualified opinion.
b. #isclaimer of opinion.
c. :nqualified opinion with a separate e,planatory
paragraph.
d. :nqualified opinion with an e,planation in the scope
paragraph.
ANSW!" &
55. An auditor may not issue a qualified opinion when
a. A scope limitation prevents the auditor from completing
an important audit procedure.
b. The auditor's report refers to the work of a
specialist.
c. An accounting principle at variance with generally
accepted accounting principles is used.
d. The auditor lacks independence with respect to the
audited entity.
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Chapter 14 Audit Reports
ANSW!" #
COMPLETION:
59. The nature of the e,amination is described in the
KKKKKKKKKKKK paragraph of the audit report.
ANSW!" S2E.
57. -enerally accepted auditing standards are addressed in the
paragraph of the audit report+ whereas generally
accepted accounting principles are the evaluation standard
used in the paragraph.
ANSW!" S2E.+ E.3N3EN
58. The two relevant dates in a dual<dated audit report are the
date of completion of audit field work and the date of the
.
ANSW!" S:&SF:NT HNT
5A. An unqualified audit opinion may be rendered only when the
financial statements contain no material departures from
-AA.+ and when no material have
prevented the auditor from collecting sufficient+ competent
evidence.
ANSW!" S2E. I3B3TAT3ENS 6!ST!32T3ENS7
9*. The statement %in our opinion the financial statements do
not present fairly% is included in a6n7 KKKKKKKKKKKK
opinion.
ANSW!" A#H!S
61. The responsibilities of management and the auditors with
respect to the financial statements are described in the
paragraph of the audit report.
ANSW!" 3NT!E#:2TE!8
9$. An audit report+ in a separate paragraph following the
opinion paragraph+ describes the impact of related party

249
Chapter 14 Audit Reports
transactions that have been properly reflected and disclosed
in the financial statements. This form of report
illustrates KK .
ANSW!" B.JAS3S E? A BATT!
9). A 2.A who audited the financial statements for the preceding
year+ and will also be auditing the current year+ is said to
be a auditor.
ANSW!" 2ENT3N:3N-
91. 3f a scope restriction is material and client<imposed+ the
auditor should render a6an7 6qualified+ adverse+
disclaimer of7 opinion.
ANSW!" #3S2IA3B! E?
65. A fourth paragraph making reference to omission of
supplemental data required by ?AS& is categori/ed as
.
ANSW!" B.JAS3S E? A BATT!
99. 3f financial statements have been prepared utili/ing a
comprehensive basis of accounting other than -AA.+ the
auditor will evaluate fairness within the framework of
KKKK KKKKKKKKKK KKKKKKKK.
ANSW!" TJ ETJ! &AS3S
MATCHING:
9=. ?rom the following types of audit reports+ select the one
that best fits each of the listed situations. A given selection
may be used once+ more than once+ or not at all.
A. Standard audit report
&. !eport qualified because of scope restriction
2. !eport qualified because of departure from -AA.
#. Adverse opinion
. #isclaimer of opinion
?. :nqualified opinion with e,planatory paragraph following
opinion paragraph
KKKKK1. Banagement refuses to permit the audit team to confirm
250
Chapter 14 Audit Reports
accounts receivable which comprise )*G of current
assets. The auditors are unable to satisfy
themselves
by other means.
KKKKK$. Although significant related party transactions have
occurred+ they are fully e,plained in the notes to the
financial statementsL and related party receivables and
payables are separately reflected on the balance sheet.
KKKKK). A ma@or legal action+ fully described in Note ) to the
financial statements+ was been brought against the
client during the year being audited. Although the
outcome is unknown+ a significant loss could result.
KKKKK1. A patent infringement lawsuit+ that could produce a
significant damage award+ was filed against the client
during the year being audited. To maintain
confidentiality+ the company elected not to
disclose the lawsuit in the notes to the financial
statements.
KKKKK5. Although the financial statements appear to be fairly
presented in all other respects+ the auditors have been
unable to satisfy themselves regarding the future
economic benefit of certain intangible assets. The
aggregate balance in these accounts is considered to be
material.

KKKKK9. The auditors did not review the quarterly financial data
of 2lient A+ a publicly held company. The data is
included in the annual report to stockholders as
part of the supplemental financial data.
KKKKK=. -iven significant appreciation of its plant assets+
2lient & elects to report them at current replacement
cost. The dollar amount of these assets accounts for
9*G of total assets. The offsetting credit resulting
from the write<up was to an account entitled
Mappreciation surplusN and is reflected as part of
stockholdersO equity.
KKKKK>. Although the client has applied an accounting principle
not in accordance with -AA.+ the audit team is satisfied
that conforming to -AA. would make the financial
statements materially misleading.

251
Chapter 14 Audit Reports
KKKKKA. 2lient ? has suffered recurring losses over the past few
years+ along with negative cash flows. 3n the auditorsO
opinion+ management has not demonstrated a viable plan
for getting the company Mback on track.N The financial
statements adequately disclose the companyOs financial
position+ results of operations+ and cash flows.
KKKKK1*. The auditors were appointed by 2lient - after year<end+
and therefore were unable to observe the taking of the
companyOs physical inventory. -iven adequate perpetual
inventory records and documentation of transactions+ the
audit team was able to satisfy themselves as to the
reasonableness of the ending inventory.
SEI:T3EN"
1.
$. A
). A
1. 2
5. &
9. ?
=. #
>. ?
A. ?
1*. A
PROBLEM/ESSAY
9>. (onathon Jershey+ 2.A+ is the senior auditor for Web Stores+
3nc.+ a company that markets products on the 3nternet. The
current year<end is (anuary )1+ $**). Iast year's audit report
contained an e,planatory paragraph because of doubt regarding the
ability of Web Stores to continue as a going concern. The
company had defaulted on two ma@or loan agreements+ and appeared
to be losing the race to develop a solid commercial presence on
the 3nternet. Since the date of last year's audit report+
however+ company management has changed. A new advertising
campaign and innovative marketing techniques+ have proven
successful. 2reditors have agreed to ma@or debt restructuring
agreements+ and the client appears to be %out of the woods.%
Required:
252
Chapter 14 Audit Reports
Assuming the company presents comparative financial
statements for $**) and $**$+ e,plain how the current audit
report+ as it relates to $**$+ will differ from the original
report on the $**$ statements. #o not draft an audit
report.
SEI:T3EN"
Iast yearOs audit report covering the year ended (anuary )1+
$**$+ included a fourth paragraph following the opinion
paragraph. ,planatory in nature+ this paragraph e,pressed the
auditorOs doubt as to the ability of Web Stores+ 3nc. to continue
as a going concern. -iven the favorable developments during the
past year+ the current report should omit the fourth paragraph.
9A. -eneral (oeOs Wholesale .roduce changed its method for
depreciating plant assets from historical cost straight<line to
replacement cost straight<line at the beginning of its fiscal
year ended Barch )1+ $**). .lant assets were also written up to
reflect replacement cost.
Required:
a. What type of accounting change is presented in this case;
b. #iscuss the possible audit report modifications resulting
from this change.

SEI:T3EN"
a. This is an error since replacement cost accounting for
plant assets is at variance with -AA..
b. #epending on the materiality of the amounts involved+
the auditor should either qualify the audit opinion or render an
adverse opinion.
=*. Audit reports frequently contain an e,planatory paragraph
following the scope paragraph or the opinion paragraph.
Required:
a. #escribe the conditions under which one might e,pect to
find an e,planatory paragraph following the opinion paragraph of
the audit report.
b. #escribe the conditions under which an e,planatory
paragraph is mandatory.
c. #raft an e,planatory paragraph for the following
situation"

253
Chapter 14 Audit Reports
#oria -ray+ the chief e,ecutive officer of #oriaOs
&eauty &otiques+ 3nc.+ also owns a large cosmetics supply
company+ -rayOs 2osmetics+ Itd. Several material
transactions have been completed between #oriaOs &eauty
&otiques and -rayOs 2osmetics. A si/eable receivable from
-rayOs 2osmetics appears on #oriaOs &eauty &otiquesO balance
sheet. As auditor for #oriaOs &eauty &otiques+ you have
concluded that the transactions have been properly reflected
in the financial statements+ and adequately described in
Note 1 to the financial statements.
SOLUTION:
a. The auditor may elect to add an e,planatory paragraph under
any one or more of the following conditions."
1. #eparture from a designated principle and the
auditor agrees with the departureL
$. #oubt as to going concern abilityL
). 2hange in accounting principle properly accounted
for and disclosedL
1. mphasis of a matter
3n addition+ omission of supplemental information required by
?AS&+ discovered errors or inconsistencies in the data+ or
failure of the auditor to apply limited procedures to the data+
may require an e,planatory paragraph. The e,planatory paragraph
does not in any way qualify the auditor's opinion.
b. 3n some cases the e,planatory paragraph is optionalL in
other cases it is required. 3n the above listing+ only 617+
emphasis of a matter permits auditor discretion as to whether or
not to add the paragraph. 3n all of the other categories+
including supplemental information required by ?AS&+ the
paragraph is mandatory.
c. The 2ompany is under common control with an affiliate
and has had significant transactions with this company 6See Note
17.
254