You are on page 1of 25

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. ANSWER: 2. D

An audit report contains the following paragraph: "Because of the inadequacies in the company's accounting records during the year ended June 30, 2003, it was not practicable to extend our auditing procedures to the extent 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 GAAP requiring a qualified audit opinion. b. An uncertainty that should not lead to a qualified opinion. c. A matter that the auditor wishes to emphasize and that does not lead to a qualified audit opinion. d. A material scope restriction requiring a qualification of the audit opinion. ANSWER: D

3.

A limitation on the scope of the auditor's examination 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. Refuses to permit its lawyer to respond to the letter of audit inquiry. c. Discloses material related party transactions in the footnotes to the financial statements.

231

232

Chapter 14 Audit Reports d. Knows that confirmation of accounts receivable is not feasible. B

ANSWER: 4.

The auditor issued a qualified opinion covering the financial statements of Client A for the year ended December 31, 2002. The reason for the qualification was a departure from GAAP. In presenting comparative statements for the years ended December 31, 2002 nd 2003, the client revised the 2002 financial statements to correct the previous departure from GAAP. The auditor's 2003 report on the 12/31/02 and 12/31/03 comparative financial statements will a. Express a qualified opinion on the 2002 financial statements and an unqualified opinion on the 2003 statements. b. Express unqualified opinions on both the 2002 and 2003 financial statements. c. Retain the qualified opinion covering the 2002 statements, but add an explanatory paragraph describing the correction of the prior departure from GAAP. d. Render qualified audit opinions for both 2002 and 2003 financial statements given the 2003 carryover effect of the 2002 error. ANSWER: B

5. an

When financial statements are presented that are not in conformity with generally accepted accounting principles, auditor may issue a(an) "Except for" Disclaimer opinion of an opinion a. Yes No b. Yes Yes c. No Yes d. No No ANSWER: A

6.

Under 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

No No ANSWER: A 8. C ANSWER: 7. For an interim period and are subjected to a limited review. An auditor may reasonably issue an "except for" qualified opinion for Inadequate Scope disclosure limitation a. The financial statements fail to contain adequate disclosure concerning related party transactions. b. b. ANSWER: C 9. Yes Yes b. Does not make the minutes of the Board of Directors' . d. Yes No c. d. An auditor's report would be designated as a special report when it is issued in connection with financial statements that are a.Chapter 14 Audit Reports 233 c. No Yes d. associated with illegal acts committed by the client's management. Presents financial statements that are prepared in accordance with the cash receipts and disbursements basis of accounting. A limitation on the scope of an auditor's examination sufficient to preclude an unqualified opinion will usually result when management a. The client refuses to permit its attorney to furnish information requested in a letter of audit inquiry. Prepared in accordance with a comprehensive basis of accounting other than generally accepted accounting principles. c. States that the financial statements are not intended to be presented in conformity with generally accepted accounting principles. Purported to be in accordance with generally accepted accounting principles but do not include a presentation of the Statement of Cash Flows. c. Unaudited and are prepared from a client's accounting records.

d. The opinion paragraph. d. Recall all copies of the audited financial statements. Boyd learned of certain related party transactions that occurred during the year under audit. ANSWER: 10. Which of the following subsequent events will be least likely to result in an adjustment to the financial statements? a. Asks the auditor to report on the balance sheet and not on the other basic financial statements. Material changes in the settlement of liabilities which were estimated as of the balance sheet date. Material changes in the quoted market prices of listed investment securities since the balance sheet date. Culmination of events affecting the realization value of accounts receivable owned as of the balance sheet date.234 Chapter 14 Audit Reports meetings available to the auditor. c. b. Boyd should a. Determine whether the lack of disclosure would affect the auditor's report. Ask the client to disclose the transactions in subsequent interim statements. These transactions were not disclosed in the notes to the financial statements. c. Plan to audit the transactions during the next engagement. Soon after Boyd's audit report was issued. d. The scope paragraph. b. c. An explanatory paragraph following the opinion paragraph. b. ANSWER: C . C d. When there is a significant change in accounting principle. ANSWER: D 11. An explanatory paragraph between the second paragraph and the opinion paragraph. an auditor's report should refer to the lack of consistency in a. ANSWER: D 12. Culmination of events affecting the realization of inventories owned as of the balance sheet date.

d. If the entity's disclosures concerning this matter are adequate. c. Management of Blue Company has decided not to account for a material transaction in accordance with the provisions of an FASB Standard. d. the audit report may include a(an) Disclaimer "Except for" of opinion qualified opinion a.Chapter 14 Audit Reports 13. management stated that total sales were $4. b. No Yes d. 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. Unqualified opinion. management has clearly demonstrated that due to unusual circumstances the financial statements presented in accordance with the FASB Standard would be misleading. The auditor is engaged after fiscal year-end and is unable to observe physical inventories or apply alternative procedures to verify their balances.95 billion and net profit . In setting forth its reasons in a note to the financial statements. Adverse opinion. Yes Yes b. No No c. "Subject to" qualified opinion. In the "management discussion and analysis" contained in the 2002 annual report of Dermicile Corporation. The auditor is unable to determine the amounts associated with illegal acts committed by the client's management. The financial statements fail to contain adequate disclosure concerning related party transactions. c. b. The auditor's report should include an explanatory separate paragraph and contain a(an) a. Yes No ANSWER: D 15. 235 Under which of the following circumstances would a disclaimer of opinion not be appropriate? a. ANSWER: B 16. The client refuses to permit its attorney to furnish information requested in a letter of audit inquiry. ANSWER: A 14. "Except for" qualified opinion.

the continuing auditor's report should cover a. but the prior year's report should be referred to. b. however. d. c. were $3. contained in the annual report. Issue a disclaimer of opinion. but the prior year's report should be presented. because the MD&A is not covered in the audit report. The financial statements. Only the current year. Only the current year. ANSWER: A . When the audited financial statements of the prior year are presented together with those of the current year. Upon noting the inconsistencies between the MD&A and the audited financial statements. the CPA should a. Issue an unqualified audit opinion with an explanatory paragraph describing the inconsistency. reflected the audited figures and the CPA planned to issue an unqualified opinion. Modify the auditor's report to disclose any reservations. b. If 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. ANSWER: A 18. ANSWER: C 17. The audited sales and net profit. Issue an unqualified opinion without an explanatory paragraph. Both years. Only the current year. d. Consider the effects of the titles on the financial statements taken as a whole. however. c. b.236 Chapter 14 Audit Reports was $500 million. Refer to the inconsistency in the audit report and issue a qualified audit opinion. Add a footnote to the financial statements which explains alternative terminology.8 billion and $450 million respectively. d. the auditor should a. Render an adverse opinion on the basis that management had intentionally misrepresented reported sales and net profit. c.

c. d. Notify persons known to be relying on the audit report that the report can no longer be relied upon. The amounts involved were material in relation to reported net assets. Report is delivered to the client. d. taken as a whole. Request the client for permission to examine or confirm the securities. Review of the working papers is complete. ANSWER: B . Morgan a. conducted by another audit partner. in which case Morgan must include in the auditor's report on the consolidated financial statements a qualified opinion with respect to the examination of the other auditor. d. Morgan is satisfied with the independence and professional reputation of the other auditor. b. b. as well as the quality of the other auditor's examination. Another CPA has examined and reported on the financial statements of a significant subsidiary of the corporation. 237 Morgan. May refer to the examination of the other auditor. With respect to Morgan's report on the consolidated financial statements. the audit team should a.Chapter 14 Audit Reports 19. b. Draft a revised audit report containing an opinion qualified for a scope restriction. May refer to the examination of the other auditor. Ignore the finding inasmuch as the financial statements and audit report have already been released. ANSWER: A 21. Field work is completed. c. Fiscal period under audit ends. had been released two months earlier. along with the audited financial statements. CPA. discovered that the audit team had failed to examine or confirm securities held in safekeeping. Must not refer to the examination of the other auditor. c. The auditor's report should be dated as of the date on which the a. Must refer to the examination of the other auditor. ANSWER: 20. The unqualified audit report. C A post-audit review. is the principal auditor for a multi-national corporation. Based on this information.

23. The auditor has no obligation to corroborate the "other information. c. ANSWER: D 22. the auditor may become aware of information that would have affected the audit report had it been known at the time." but should read the "other information" to determine whether it is materially inconsistent with the financial statements. the auditor must take appropriate action. 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. Draft a revised audit report expressing a qualified or adverse opinion." d. and transmit the report to the stockholders. Determine whether the information is reliable and whether the facts existed at the date of the audit report. the auditor should issue a . Given discovery of such information. The auditor must modify the auditor's report to state that the "other information is unaudited" or "not covered by the auditor's report.238 Chapter 14 Audit Reports After issuing the audit report. the auditor should notify the board of directors and regulatory agencies having jurisdiction over the client that the auditors' report can no longer be relied upon. to financial statement users. Request the client to disclose. Which of the following actions would be considered inappropriate under these circumstances? a. When an auditor conducts an examination 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 newly discovered facts and their impact on the financial statements. depending on the materiality of the effect. The auditor should extend the examination to the extent necessary to verify the "other information." b. The auditor has no obligation to read the "other information." ANSWER: B 24. b. c. d. If the client refuses to inform third parties.

d. b. ANSWER: B . however.Chapter 14 Audit Reports a. b. D 239 ANSWER: 25. c. agrees with the departure on the basis that use of the promulgated standard would make the financial statements materially misleading. The auditor. The substance of the related party transactions is properly disclosed in the audited financial statements. Review report. Under which of the following circumstances would an unqualified audit opinion. not be appropriate? a. d. ANSWER: A 26. The chief executive officer refuses the auditor access to minutes of board of directors' meetings. c. In which of the following circumstances would an auditor be most likely to express an adverse opinion? a. Special report. The statements are not in conformity with the FASB Statements regarding the capitalization of leases. The auditor believes that substantial doubt exists concerning the ability of the client to continue as a going concern. b. Information comes to the auditor's attention that raises substantial doubt about the entity's ability to continue in existence. followed by an explanatory paragraph. The client has used a method of revenue recognition that is at variance with promulgated accounting standards. Control tests show that the entity's internal control is so poor that the financial records cannot be relied upon. 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. d. Disclaimer of opinion. The auditor wishes to emphasize that the client has entered into material transactions with related parties. Qualified opinion.

was engaged to perform an examination of the financial statements of Ally Incorporated one month after its fiscal year had ended. c. If the predecessor auditor's report was qualified. A standard unqualified opinion. b. c. Doe.240 Chapter 14 Audit Reports 27. an independent auditor. Feasibility of plans to purchase leased equipment at less than market value. Comparative financial statements include the financial statements of a prior period which were examined by a predecessor auditor whose report is not presented. d. the successor auditor must a. b. 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. Issue a standard comparative audit report indicating the division of responsibility. and accounts receivable were not confirmed by direct communication with debtors. An unqualified opinion and an explanatory middle paragraph. Although the inventory count was not observed by Doe. ANSWER: C 29. An "except for" qualification. Either a qualified opinion or a disclaimer of opinion. Obtain written approval from the predecessor auditor to include the prior year's financial statements. Committed arrangements to convert preferred stock to long-term debt. Doe was able to gain satisfaction by applying alternative auditing procedures. Doe's auditor's report will probably contain a. Marketability of assets that management plans to sell. Disclose the reasons for any qualification in the predecessor auditor's opinion. b. Express an opinion on the current year statements alone and make no reference to the prior year statements. c. . ANSWER: A 28. d. d. Ability to expand operations into new product lines in the future.

Take no action because the auditor has no obligation to make any further inquiries. Unqualified audit opinion with an explanatory paragraph added to describe a material uncertainty. Refers to the authoritative pronouncements that explain the comprehensive basis of accounting being used. ANSWER: D An audit report contained the following wording: "In our opinion. The auditor should a. request that revised financial statements be issued. c. the client decided to sell the shares of a subsidiary that accounts for 30% of its revenue and 25% of its net income. Adverse audit opinion.. States that the financial statements are not intended to have been examined in accordance with generally accepted auditing standards." This excerpt was taken from a(n) a. d. except for the omission of the segment information referred to in the preceding paragraph.Chapter 14 Audit Reports ANSWER: D 241 30. b. 32. Audit opinion qualified due to a departure from GAAP. Unqualified audit opinion with an explanatory paragraph added to emphasize a matter. Describe the effects of this subsequently discovered information in a communication with persons known to be relying on the financial statements. Notify the entity that the auditor's report may no longer be associated with the financial statements. States that the financial statements are not intended to be in conformity with generally accepted accounting principles. c. 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. if determined to be reliable. A After an audit report containing an unqualified opinion on a non-public client's financial statements was issued. ANSWER: 31. Determine whether the information is reliable and.. c. . b. d. d. Justifies the comprehensive basis of accounting being used. b.

" c. b. Disclaimer of opinion due to scope restrictions. "Except for" opinion. b. c. an opinion on these financial statements. Adverse opinion. Disclaimer of opinion due to uncertainty. An auditor's examination reveals a misstatement in segment information that is material in relation to the financial statements taken as a whole. ANSWER: C 34. Necessitates a revision of the opinion paragraph to include the phrase "with the foregoing explanation. Adverse audit opinion. d. Is considered an "except for" qualification of the report. the scope of our work was not sufficient to enable us to express. d. Audit opinion qualified for material scope restrictions.242 Chapter 14 Audit Reports ANSWER: 33. C An auditor includes a separate paragraph in an otherwise unqualified report to emphasize that the entity being reported upon had significant transactions with related parties. b. the auditor should issue a(n) a. Is appropriate and would not negate the unqualified opinion. d. Unqualified opinion. 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. Violates generally accepted auditing standards if this information is already disclosed in footnotes to the financial statements. ANSWER: B 35. c. The inclusion of this separate paragraph a. Disclaimer of opinion. and we do not express. ANSWER: A ." This paragraph illustrates a(n) a. If the client refuses to make modifications to the presentation of segment information.

Disclaimer of opinion. c. c. Adverse audit opinion. ANSWER: 38. A description of a change in accounting principles. except a. Audit opinion qualified for a departure from GAAP. Unqualified audit opinion with an explanatory paragraph describing the client's unique accounting practices. Under these circumstances. the auditor will probably issue a(n) a. Also. 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 existence and also believes there are uncertainties about the recoverability of recorded asset amounts on the financial statements. An opinion as to whether the financial statements are presented fairly in conformity with the basis of accounting described. "Except for" qualified opinion for scope limitation.Chapter 14 Audit Reports 36. c. D Client A reports property. An opinion as to whether the use of the disclosed method is appropriate. The company uses the accrual method for financial reporting purposes. the company does not defer income taxes for temporary differences arising from using the installment method of recognizing gross profit for tax purposes. d. d. the auditor may issue a(an) a. and equipment at appraisal values and records depreciation based on the appraised amounts. ANSWER: B 37. "Except for" qualified opinion for departure from GAAP. b. d. 243 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. b. b. Unqualified opinion with an explanatory separate paragraph. Adverse opinion. Disclosure of the fact that the financial statements are not intended to be presented in conformity with generally accepted accounting principles. plant. ANSWER: B .

Disclaim an opinion. d. b.244 Chapter 14 Audit Reports 39. the a. Name of the other auditor. ANSWER: 40. c. b. in the introductory. Magnitude of the portion of the financial statements examined by the other auditor. ANSWER: 42. An auditor may issue a qualified opinion under which of the following circumstances? Lack of sufficient competent evidential matter Yes Yes No No A Restrictions on the scope of the audit Yes No Yes No a. d. c. D When a principal auditor decides to make reference to another auditor's examination. The CPA should a. b. Division of responsibility. Qualify the opinion because of the deviation from generally accepted accounting principles. the principal auditor's report should always indicate clearly. d. Not allow the accounting treatment for this item to affect the type of opinion because the deviation from generally accepted accounting principles was disclosed. ANSWER: D 41. c. Express an unqualified opinion and insert a middle paragraph emphasizing the matter by reference to the footnote. and opinion paragraphs. In which of the following circumstances may the auditor issue the standard audit report? . scope. Disclaimer of responsibility concerning the portion of the financial statements examined by the other auditor. A CPA engaged to examine 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.

b. An explanatory paragraph between the second paragraph and the opinion paragraph. The financial statements are affected by a departure from a generally accepted accounting principle. The auditor decides to make reference to the report of another auditor as a basis. b. When there is a significant change in accounting principle. b. The opinion paragraph. Explicitly Explicitly b. d. The auditor wishes to emphasize a matter regarding the financial statements.Chapter 14 Audit Reports a. ANSWER: D 45. an auditor's report should refer to the lack of consistency in a. 245 The principal auditor assumes responsibility for the work of another auditor. c. The entity issues financial statements that present . for the auditor's opinion. Does the auditor make the following representations explicitly or implicitly when issuing the standard auditor's report on comparative financial statements? Consistent Examination of application of evidence on a accounting principles test basis a. The auditor wishes to emphasize that the entity had significant related party transactions. d. d. ANSWER: C Implicitly Explicitly Explicitly Implicitly 44. A ANSWER: 43. The scope paragraph. in part. In which of the following situations would an auditor ordinarily issue an unqualified audit opinion without an explanatory paragraph? a. Implicitly Implicitly c. An explanatory paragraph following the opinion paragraph. c. c. Substantial doubt exists concerning the ability of the entity to continue as a going concern.

c. Preceding the opinion paragraph. Qualify the opinion and describe the departure from generally accepted accounting principles within the opinion paragraph. the statement of cash flows. the effect of which is material. Within the notes to the financial statements. b. . Qualify the opinion and explain the effect of the departure from generally accepted accounting principles in a separate paragraph. Following the opinion paragraph. c. b. b. Disclaim an opinion and describe the departure from generally accepted accounting principles within the opinion paragraph. How are management's responsibility and the auditor's responsibility represented in the standard auditor's report? Management's Auditor's responsibility responsibility a. ANSWER: 47. ANSWER: B 48.246 Chapter 14 Audit Reports financial position and results of operations. Disclaim an opinion and explain the effect of the departure from generally accepted accounting principles in a separate paragraph. d. c. B ANSWER: 46. When the financial statements contain a departure from generally accepted accounting principles. the auditor should a. A Explicitly Implicitly Implicitly Explicitly Explicitly Implicitly Explicitly Implicitly An auditor should disclose the substantive reasons for expressing an adverse opinion in an explanatory paragraph a. but the circumstances are fully disclosed in the financial statements. Preceding the scope paragraph. d. The auditor has substantial doubt about the entity's ability to continue as a going concern. d. but omits d.

The auditor's updated report on the prior-period financial statements should a. A Tread Corp. D an ANSWER: 50. Determine accounting principles for the purpose of financial reporting by companies offering securities to the public. An auditor has previously expressed a qualified opinion on the financial statements of a prior period because of a departure from generally accepted accounting principles. Disclaimer of opinion or an unqualified opinion with c. Deny lack of privity as a defense in third-party actions for gross negligence against the auditors c. Bear the same date as the original auditor's report on the prior period.Chapter 14 Audit Reports 247 ANSWER: 49. Be accompanied by the original auditor's report on the prior period. b. C of ANSWER: 51. 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 prior-period financial statements are restated in the current period to conform with generally accepted accounting principles. . Qualified opinion or a disclaimer of opinion. d. b. Require a change of auditors of governmental entities after a given period of years as a means of ensuring auditor independence. b. explanatory paragraph. Unqualified opinion with an explanatory paragraph and an adverse opinion. The Securities and Exchange Commission has authority to a. d. Adverse opinion and a qualified opinion. c. The auditor would choose between expressing a(an) a. public companies. Express an unqualified opinion concerning the restated financial statements. Prescribe specific auditing procedures to detect fraud concerning inventories and accounts receivable of companies engaged in interstate commerce.

b. Disclaimer of opinion. Unqualified opinion with a separate explanatory paragraph. . c. results of operations. Affected by a material uncertainty. although the auditor was able to examine satisfactory evidence for all other items in the financial statements. Qualify the opinion concerning the restated financial statements because of a change in accounting A principle. ANSWER: 52. "Except for" qualified opinion. Restrictions imposed by a client prohibit the observation of physical inventories. The auditor should also refer to the limitation in the Scope Opinion Notes to the paragraph paragraph financial statements a. Yes Yes Yes ANSWER: C 54. ANSWER: 53. Misleading d. Yes No Yes b. The auditor should issue a(an) a." This auditor's report was most likely issued in connection with financial statements that are a. No Yes No c. which account for 35% of all assets. d. Yes Yes No d. or cash flows in conformity with generally accepted accounting principles. b. Prepared in accordance with another comprehensive basis of accounting. Unqualified opinion with an explanation in the scope paragraph. Alternative audit procedures cannot be applied. c. Inconsistent.248 Chapter 14 Audit Reports d. C An auditor who qualifies an opinion because of an insufficiency of evidential matter should describe the limitation in an explanatory paragraph. An auditor's report includes the following statement: "The financial statements do not present fairly the financial position.

The nature of the examination is described in the ____________ paragraph of the audit report. SCOPE Generally accepted auditing standards are addressed in the paragraph of the audit report. c. d. A scope limitation prevents the auditor from completing an important audit procedure. An accounting principle at variance with generally accepted accounting principles is used.Chapter 14 Audit Reports ANSWER: 55. ANSWER: D COMPLETION: 56. ANSWER: SUBSEQUENT EVENT 59. The auditor's report refers to the work of a specialist. B 249 An auditor may not issue a qualified opinion when a. b. competent evidence. ANSWER: 57. and when no material have prevented the auditor from collecting sufficient. ANSWER: SCOPE LIMITATIONS (RESTRICTIONS) . The two relevant dates in a dual-dated audit report are the date of completion of audit field work and the date of the . ANSWER: SCOPE. whereas generally accepted accounting principles are the evaluation standard used in the paragraph. The auditor lacks independence with respect to the audited entity. An unqualified audit opinion may be rendered only when the financial statements contain no material departures from GAAP. OPINION 58.

ANSWER: ADVERSE 60. ANSWER: EMPHASIS OF A MATTER 63. ANSWER: INTRODUCTORY 62. is said to be a auditor. the auditor should render a(an) (qualified. ANSWER: CONTINUING 64. ANSWER: DISCLAIMER OF 65. This form of report illustrates __ . A fourth paragraph making reference to omission of supplemental data required by FASB is categorized as . The responsibilities of management and the auditors with respect to the financial statements are described in the paragraph of the audit report. A CPA who audited the financial statements for the preceding year. If financial statements have been prepared utilizing a comprehensive basis of accounting other than GAAP. disclaimer of) opinion. in a separate paragraph following the opinion paragraph. and will also be auditing the current year. An audit report. ANSWER: THE OTHER BASIS MATCHING: . 61. adverse. ANSWER: EMPHASIS OF A MATTER 66.250 Chapter 14 Audit Reports The statement "in our opinion the financial statements do not present fairly" is included in a(n) ____________ opinion. the auditor will evaluate fairness within the framework of ____ __________ ________. If a scope restriction is material and client-imposed. describes the impact of related party transactions that have been properly reflected and disclosed in the financial statements.

A major legal action. A given selection may be used once. To maintain confidentiality. was filed against the client during the year being audited. Although outcome is unknown. Unqualified opinion with explanatory paragraph following opinion paragraph _____1. Although significant related party transactions have occurred. and related party receivables and payables are separately reflected on the balance sheet. The auditors did not review the quarterly financial data of Client A. The data is _____3. that could produce a significant damage award. more than once. they are fully explained in the notes to the financial statements. Standard audit report B. The aggregate balance in these accounts is considered to be material. A. a publicly held company. fully described in Note 3 to the financial statements. select the one that best fits each of the listed situations. . the company elected not to disclose the lawsuit in the notes to the financial statements. was been brought against the client during the year being audited. The auditors are unable to satisfy themselves by other means. Adverse opinion E. Report qualified because of departure from GAAP D. A patent infringement lawsuit. Disclaimer of opinion F. a significant loss could result. _____5. Management refuses to permit the audit team to confirm accounts receivable which comprise 30% of current assets.Chapter 14 Audit Reports 251 67. Report qualified because of scope restriction C. the _____6. _____4. Although the financial statements appear to be fairly presented in all other respects. From the following types of audit reports. _____2. the auditors have been unable to satisfy themselves regarding the future economic benefit of certain intangible assets. or not at all.

Given significant appreciation of its plant assets. Given adequate perpetual inventory records and documentation of transactions. 7. 2.” The financial statements adequately disclose the company’s financial position. and therefore were unable to observe the taking of the company’s physical inventory. The auditors were appointed by Client G after year-end. _____10. 5. along with negative cash flows. The offsetting credit resulting from the write-up was to an account entitled “appreciation surplus” and is reflected as part of stockholders’ equity. The dollar amount of these assets accounts for 60% of total assets. 6. results of operations.252 Chapter 14 Audit Reports included in the annual report to stockholders as part of the supplemental financial data. and cash flows. E A A C B F D F F A PROBLEM/ESSAY . 3. management has not demonstrated a viable plan for getting the company “back on track. 9. _____7. SOLUTION: 1. Client F has suffered recurring losses over the past few years. the audit team was able to satisfy themselves as to the reasonableness of the ending inventory. 4. 8. _____9. _____8. In the auditors’ opinion. Client B elects to report them at current replacement cost. the audit team is satisfied that conforming to GAAP would make the financial statements materially misleading. Although the client has applied an accounting principle not in accordance with GAAP. 10.

the current report should omit the fourth paragraph. Jonathon Hershey. Discuss the possible audit report modifications resulting from this change. have proven successful. CPA. however. Creditors have agreed to major debt restructuring agreements. and the client appears to be "out of the woods. Last year's audit report contained an explanatory paragraph because of doubt regarding the ability of Web Stores to continue as a going concern. Given the favorable developments during the past year. is the senior auditor for Web Stores. a company that markets products on the Internet. and appeared to be losing the race to develop a solid commercial presence on the Internet. The current year-end is January 31. The company had defaulted on two major loan agreements. this paragraph expressed the auditor’s doubt as to the ability of Web Stores.. Explanatory in nature. SOLUTION: . 2002. 2003. Inc. Since the date of last year's audit report.Chapter 14 Audit Reports 68. Inc. What type of accounting change is presented in this case? b. company management has changed. included a fourth paragraph following the opinion paragraph. explain how the current audit report. 69. General Joe’s Wholesale Produce 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 March 31. Required: a. SOLUTION: Last year’s audit report covering the year ended January 31. 2003. will differ from the original report on the 2002 statements. A new advertising campaign and innovative marketing techniques. to continue as a going concern. as it relates to 2002. Plant assets were also written up to reflect replacement cost. Do not draft an audit report." Required: 253 Assuming the company presents comparative financial statements for 2003 and 2002.

Describe the conditions under which one might expect to find an explanatory paragraph following the opinion paragraph of the audit report. In the above listing. in other cases it is required. b. Change in accounting principle properly accounted for and disclosed. . SOLUTION: a. As auditor for Doria’s Beauty Botiques. Depending on the materiality of the amounts involved. also owns a large cosmetics supply company. 4. Describe the conditions under which an explanatory paragraph is mandatory. A sizeable receivable from Gray’s Cosmetics appears on Doria’s Beauty Botiques’ balance sheet. you have concluded that the transactions have been properly reflected in the financial statements. Ltd. Doubt as to going concern ability. b. omission of supplemental information required by FASB.. This is an error since replacement cost accounting for plant assets is at variance with GAAP. b. discovered errors or inconsistencies in the data. only (4). Inc. the chief executive officer of Doria’s Beauty Botiques. and adequately described in Note 4 to the financial statements. Required: a.: 1. the auditor should either qualify the audit opinion or render an adverse opinion. The auditor may elect to add an explanatory paragraph under any one or more of the following conditions. Gray’s Cosmetics. The explanatory paragraph does not in any way qualify the auditor's opinion. c.254 Chapter 14 Audit Reports a. Draft an explanatory paragraph for the following situation: Doria Gray. 70. Several material transactions have been completed between Doria’s Beauty Botiques and Gray’s Cosmetics. 2. In some cases the explanatory paragraph is optional. 3. Emphasis of a matter In addition. or failure of the auditor to apply limited procedures to the data. Departure from a designated principle and the auditor agrees with the departure. Audit reports frequently contain an explanatory paragraph following the scope paragraph or the opinion paragraph. may require an explanatory paragraph.

The Company is under common control with an affiliate and has had significant transactions with this company (See Note 4). . the paragraph is mandatory. c.Chapter 14 Audit Reports 255 emphasis of a matter permits auditor discretion as to whether or not to add the paragraph. including supplemental information required by FASB. In all of the other categories.