Chapter 15 - Audit Reports on Financial Statements
1. For the last several years, both the Financial Accounting Standards Board (FASB) and the International
Auditing and Assurance Standards Board (IAASB) have been considering possible changes to the standard
unqualified audit report.
a.
True
b.
False
2. The audit report can be a verbal presentation to the audit committee about the client.
a.
True
b.
False
3. There are no differences in audit report requirements across the standards of the AICPA, PCAOB, and
IAASB.
a.
True
b.
False
4. The auditor should only provide an opinion on the financial statements if the opinion indicates that the
financial statements are fairly stated in all material respects.
a.
True
b.
False
Chapter 15 - Audit Reports on Financial Statements
5. The audit report delineates the responsibility of client management and that of the audit firm.
a.
True
b.
False
6. A client that has a departure from generally accepted accounting principles that is immaterial will receive a
qualified or adverse opinion.
a.
True
b.
False
7. For some engagements, the financial statements might be audited in accordance with multiple auditing
standards.
a.
True
b.
False
8. When there is an uncertainty surrounding the financial statements, the auditor may still be able to give an
unqualified opinion.
a.
True
b.
False
Chapter 15 - Audit Reports on Financial Statements
9. An important component of an audit report is that the title includes the word “competent.”
a.
True
b.
False
10. Andrews Corporation adopted an accounting principle that is a material departure from GAAP. The auditor
determined that the financial statements are fairly presented, except for this specifically identifiable GAAP
departure, and therefore would issue a disclaimer of opinion.
a.
True
b.
False
11. The audit report is modified to five paragraphs as a result of another audit firm performing part of the
financial statement audit.
a.
True
b.
False
12. A justified departure from GAAP will result in the issuance of an adverse opinion.
a.
True
b.
False
Chapter 15 - Audit Reports on Financial Statements
13. When financial statements contain generally accepted accounting principles in the current year that are
different from the generally accepted accounting principles used in the preceding year, the auditor will typically
make mention of it in the opinion.
a.
True
b.
False
14. After the balance sheet date but prior to the audit report date the client decides to acquire Bargain Company
to obtain a significant increase in revenues. The auditor would probably give a report that includes the
statement: "except for the acquisition of Bargain Company...".
a.
True
b.
False
15. An unqualified audit opinion with an explanatory paragraph often makes reference to the footnotes of the
financial statements
a.
True
b.
False
16. The substantial doubt about an entity's ability to continue as a going concern is a phrase that is used in an
unqualified opinion with a certain type of explanatory language.
a.
True
b.
False
Chapter 15 - Audit Reports on Financial Statements
17. Under international auditing standards, when the audit client has engaged other audit firms to audit remote
locations around the country, the principal auditor must mention the other audit firms in the audit report.
a.
True
b.
False
18. An auditor is not required to tell the reader of an audit report when there has been a change in accounting
principles that materially affects the financial statements.
a.
True
b.
False
19. The term "except for" is used in the opinion paragraph of an audit report that will be qualified for a GAAP
violation that is not pervasive.
a.
True
b.
False
20. A client that treats a material lease transaction as an operating lease when it is in fact a capital lease has
deviated from GAAP and will receive a qualified or adverse opinion.
Chapter 15 - Audit Reports on Financial Statements
a.
True
b.
False
21. Restrictions on the scope of the audit whether imposed by the client or circumstances may require the
auditor to issue either a qualified or an adverse opinion.
a.
True
b.
False
22. For a change in accounting principles that management does not justify to the auditor, the auditor will likely
choose between a qualified and an adverse opinion.
a.
True
b.
False
23. Inconsistent application of accounting principles by the client is a GAAP violation and would result in a
qualified audit report.
a.
True
b.
False
Chapter 15 - Audit Reports on Financial Statements
24. Uncertainties, such as doubt about the going concern of a client, may result in an adverse opinion.
a.
True
b.
False
25. If the auditor concludes that the financial statements taken as a whole are not fairly presented, the auditor
should issue an adverse opinion.
a.
True
b.
False
26. If scope limitations that are not client-imposed exist make it impossible for the auditor to form an opinion,
the auditor should render an adverse opinion.
a.
True
b.
False
27. The failure of a client to include a statement of cash flows will result in the issuance of a disclaimer of
opinion by the auditor.
a.
True
b.
False
Chapter 15 - Audit Reports on Financial Statements
28. When the auditor is unable to obtain sufficient, appropriate evidence concerning the beginning inventory,
which is material, the report is modified by adding an explanatory paragraph prior to the opinion paragraph and
appropriate modification to the scope paragraph.
a.
True
b.
False
29. The client will not allow Collier and Company, CPAs to read the minutes of the board of director's meetings
that occurred during the year under audit. Such a limitation will usually result in the auditor issuing a
disclaimer.
a.
True
b.
False
30. If the firm auditing a company realizes that it is not independent with respect to the client, it will issue
disclaimer of opinion based on the inherent GAAP violation imposed by the audit firm.
a.
True
b.
False
31. For a client with serious going concern issues the auditor has to make a choice between issuing an
unqualified audit report with an explanatory paragraph or a disclaimer.
a.
True
b.
False
Chapter 15 - Audit Reports on Financial Statements
32. An auditor can issue a disclaimer of opinion because of an inability to obtain sufficient appropriate
evidence.
a.
True
b.
False
33. When circumstances preclude an auditor from performing certain procedures and the auditor can be satisfied
using other alternative procedures, a disclaimer of opinion will be rendered.
a.
True
b.
False
34. The scope paragraph of an unqualified opinion primarily provides information relating to the division of
responsibilities.
a.
True
b.
False
35. Because of its importance, the decision about what type of opinion to issue is often made after consultation
with other professionals within the firm.
a.
True
b.
False
Chapter 15 - Audit Reports on Financial Statements
36. If a significant scope limitation is imposed by the client, a disclaimer should ordinarily be issued.
a.
True
b.
False
37. The most difficult decisions about which opinion to issue are generally centered around decisions based on
the materiality level and pervasiveness of GAAP violations, the significance of scope limitations, and the
likelihood of the entity being a going concern.
a.
True
b.
False
38. The auditor is only concerned about the aggregate internal control deficiencies when determining the
appropriate opinion on internal control over financial reporting (ICFR).
a.
True
b.
False
39. The auditor will issue an unqualified opinion on ICFR if the auditor has identified only one material
weakness in ICFR.
a.
True
b.
False
Chapter 15 - Audit Reports on Financial Statements
40. The auditor will modify the audit report on ICFR effectiveness when management's annual certification
pursuant to Section 302 of the Sarbanes-Oxley Act is misstated.
a.
True
b.
False
41. If the auditor determines that management’s annual report on internal controls is incomplete or not properly
presented, the auditor’s report will include an explanatory paragraph that describes the reasons for this
determination.
a.
True
b.
False
42. The decision about whether to make reference to another auditor in the report on the audit of ICFR does not
differ from the corresponding decision as it relates to the audit of the financial statements.
a.
True
b.
False
43. Auditing reporting standards for financial statement and integrated audits require auditors to provide which
of the following?
a.
Positive assurance.
b.
Negative assurance.
c.
Materiality assurance.
d.
No assurance.
Chapter 15 - Audit Reports on Financial Statements
44. Which of the following is a change that is not being debated by auditing standard setters and investors?
a.
Adding disclosure about which engagement partner at the firm supervised the audit and who from
outside the audit firm participated in the audit
b.
Adding commentary on areas of risk of material misstatement of the financial statements identified
by the auditor.
c.
Adding commentary about the level of materiality applied by the auditor to perform the audit.
d.
All of the above are being debated.
45. According to the AICPA, the auditor needs to form an opinion on the financial statements based on an
evaluation of the audit evidence obtained. This is stated in which AICPA principle governing an audit
conducted in accordance with GAAS?
a.
Principle 1
b.
Principle 4
c.
Principle 5
d.
Principle 7
46. According to the AICPA, the auditor needs to clearly express an opinion based on audit evidence obtained
in the form of a written report.This is stated in which AICPA principle governing an audit conducted in
accordance with GAAS?
a.
Principle 1
b.
Principle 4
c.
Principle 5
d.
Principle 7
Chapter 15 - Audit Reports on Financial Statements
47. According to the AICPA principles, which of the following is incorrect?
a.
If the auditor has reservations about the fairness of financial statement presentation, the reason(s)
must be stated in the auditor’s report.
b.
If there is a material departure from GAAP in the financial statements, the auditor should explicitly
state the nature of the departure and the dollar effects where determinable.
c.
Auditors should state the reasons why an unqualified opinion cannot be issued.
d.
Auditors should issue an unqualified opinion in all cases where companies have provided an entire
set of financial statements and footnotes that include all years presented for comparative purposes.
48. Which one of the following is not a type of unqualified audit opinion issued by auditors?
a.
Standard with three paragraphs.
b.
Includes explanatory paragraph.
c.
Includes modifications.
d.
Does not include the opinion paragraph.
49. Which one of the following is an example of the contents of an opinion paragraph found in an audit report?
a.
"We have audited...."
b.
"Nothing came to our attention..."
c.
"The financial statements referred to above present fairly,..."
d.
"An audit includes examining, on a test basis..."
Chapter 15 - Audit Reports on Financial Statements
50. In which one of the following instances would an auditor most likely issue a standard unqualified opinion
without explanatory language?
a.
Management's disclosures are missing or inadequate.
b.
There is substantial doubt about the entity's ability to continue as a going concern.
c.
There is a significant limitation on the scope of the engagement.
d.
There is an immaterial deviation from GAAP related to capitalizing repairs.
51. The division of responsibility between the reporting company's management and the audit firm is described
in which one of the following?
a.
Scope paragraph.
b.
Introductory paragraph.
c.
Notes to the financial statements.
d.
Opinion paragraph.
52. If the auditor believes that there is a remote probability that resolution of an uncertainty will have a material
effect on the financial statements, which of the following would the auditor issue?
a.
A disclaimer of opinion.
b.
A standard unqualified opinion.
c.
An adverse opinion.
d.
An unqualified opinion with explanatory paragraphs.
Chapter 15 - Audit Reports on Financial Statements
53. The scope paragraph of an unqualified opinion primarily gives information relating to which of the
following?
a.
The division of responsibilities.
b.
The final assessment of a company’s standings with the audit firm.
c.
The statements and dates under audit.
d.
Audit planning and procedure.
54. Audit reports are designed to promote clear communication between the auditor and the financial statement
user. Which of the following is not delineated in the audit report?
a.
What was audited and the relative responsibilities of the client and the auditor.
b.
The experience level of the audit team.
c.
The nature of the audit opinion formulation process.
d.
The auditor’s opinion on the fairness of the financial statements.
55. If the auditor decides to draw attention to large related party transactions occurring in the financial
statements of the client, which report will most likely be issued?
a.
Qualified.
b.
Unqualified with an explanatory paragraph
c.
Adverse.
d.
Consolidation.
56. The use of another CPA firm by an audit firm to perform part of the engagement on a client's subsidiary will
require the audit firm to do which of the following?
Chapter 15 - Audit Reports on Financial Statements
a.
Merge with the other CPA firm.
b.
Perform a peer review on the other CPA firm.
c.
Ensure the independence of the other CPA firm of the client.
d.
List the other firm in the footnotes to the client's financial statements.
57. When financial statements contain a material, unjustified departure from GAAP, which of the following is
contained in the audit report?
a.
A Qualification: Yes; An Explanatory Paragraph After the Opinion Paragraph: No.
b.
A Qualification: Yes; An Explanatory Paragraph After the Opinion Paragraph: Yes.
c.
A Qualification: No; An Explanatory Paragraph After the Opinion Paragraph: Yes.
d.
A Qualification: No; An Explanatory Paragraph After the Opinion Paragraph: No.
58. When the financial statements contain a material departure from GAAP that the auditor believes is justified,
where should the justification appear?
a.
In a footnote.
b.
In a paragraph added before the scope paragraph.
c.
In the opening paragraph.
d.
In a paragraph added before the opinion paragraph.
59. Which one of the following is an instance where the auditor would add a paragraph after the opinion
paragraph?
a.
There is serious doubt that the client can continue as a going concern.
b.
Management's disclosures are not adequate.
c.
There are significant uncertainties that are not properly disclosed in the footnotes.
Chapter 15 - Audit Reports on Financial Statements
d.
There is a material dollar misstatement in the financial statements.
60. A client company has a history of negative cash flow trends and continuing losses. Which type of opinion
will the auditor most likely issue?
a.
Adverse.
b.
Unqualified with explanatory language.
c.
Qualified.
d.
Disclaimer of opinion.
61. When the auditor wishes to emphasize a matter in the financial statements, which of the following would the
audit report contain?
a.
A Qualification: Yes; An Explanatory Paragraph After the Opinion Paragraph: No.
b.
A Qualification: Yes; An Explanatory Paragraph After the Opinion Paragraph: Yes.
c.
A Qualification: No; An Explanatory Paragraph After the Opinion Paragraph: Yes.
d.
A Qualification: No; An Explanatory Paragraph After the Opinion Paragraph: No.
62. When the auditor is unable to obtain sufficient appropriate evidence because the client did not allow a
procedure to be completed, which of the following would the report most likely contain?
a.
A Qualification: Yes; An Explanatory Paragraph After the Opinion Paragraph: No.
b.
A Qualification: Yes; An Explanatory Paragraph After the Opinion Paragraph: Yes.
c.
A Qualification: No; An Explanatory Paragraph After the Opinion Paragraph: Yes.
d.
A Qualification: No; An Explanatory Paragraph After the Opinion Paragraph: No.
Chapter 15 - Audit Reports on Financial Statements
63. In the audit of consolidated financial statements under U.S. auditing standards when more than one CPA
firm is involved and the principal audit firm chooses to mention the other firm(s), the wording of which
paragraph(s) is modified?
a.
Introductory Paragraph: No; Scope Paragraph: No; Opinion Paragraph: Yes.
b.
Introductory Paragraph: No; Scope Paragraph: Yes; Opinion Paragraph: Yes.
c.
Introductory Paragraph: Yes; Scope Paragraph: Yes; Opinion Paragraph: Yes.
d.
Introductory Paragraph: Yes; Scope Paragraph: Yes; Opinion Paragraph: No.
64. Which of the following would not result in an unqualified audit report with an explanatory paragraph?
a.
Going concern issue.
b.
Scope limitation.
c.
Emphasis of a matter.
d.
Consistency of presentation.
65. How would the auditor categorize a situation when the financial statements do not contain a footnote the
auditor believes is necessary for fair presentation?
a.
A scope limitation.
b.
An uncertainty.
c.
A departure from GAAP.
d.
An act discreditable.
Chapter 15 - Audit Reports on Financial Statements
66. In which one of the following cases would an auditor most likely issue a qualified opinion?
a.
There is a highly material, and very pervasive departure from SFAS No. 141 and No. 142.
b.
There is a change in accounting principles promulgated by the FASB.
c.
There is an immaterial dollar misstatement on the financial statements.
d.
There is one material departure from GAAP that is affects only two accounts.
67. Qualified opinions can only be issued by auditors for which of the following?
a.
Violations of GAAP.
b.
Scope limitations.
c.
Going concern.
d.
Lack of independence.
e.
Either A and B.
68. Violations of GAAP resulting in qualified opinions affect the standard audit report through which of the
following?
a.
Modifying the scope paragraph.
b.
Adding an explanatory paragraph before the opinion paragraph.
c.
Modifying the opinion paragraph to read “except for.”
d.
Both B and C.
e.
All of the above.
69. Which of the following is an example of circumstances that would not limit the audit scope?
Chapter 15 - Audit Reports on Financial Statements
a.
An inadequacy in the accounting records.
b.
The inability to gather sufficient competent evidence.
c.
Emphasis of an important matter.
d.
The timing of the fieldwork.
70. Which of the following phrases should not be used when the auditor is qualifying the audit opinion?
a.
Except for.
b.
Subject to.
c.
With the exception of.
d.
With the qualification of.
71. If a client expensed the acquisition cost of some assets that should have been capitalized and depreciated
them over their useful lives, which of the following would be incorrect?
a.
A qualified opinion would be appropriate.
b.
The opinion paragraph should be modified to include language such as: “except for the effects of not
capitalizing the acquisition costs of some assets...”
c.
An explanatory paragraph should include the effects of the subject matter of the qualification, where
practicable.
d.
An explanatory paragraph should be modified to include language such as: “subject to the qualified
act...”
72. Adverse opinions can only be issued by auditors based on which of the following?
a.
Violations of GAAP.
b.
Scope limitations.
Chapter 15 - Audit Reports on Financial Statements
c.
Going concern.
d.
Lack of independence.
e.
Either B or D.
73. Adverse opinions affect the standard audit report in which of the following ways?
a.
Modifying the scope paragraph.
b.
Adding an explanatory paragraph before the opinion paragraph.
c.
Modifying the opinion paragraph to read “ does not present fairly.”
d.
Both B and C.
e.
All of the above.
74. The opinion paragraph of the audit report for Schnook Co. states that the financial statements "do not
present fairly". Which type of audit report is this?
a.
Improper.
b.
Adverse.
c.
Disclaimer.
d.
Qualified.
75. An audit of the Flagler Company, a diamond mining company, brings to light the fact that its equipment has
been marked up to the owners’ expectation of market values. Such a situation will most likely result in which
type of report?
a.
Disclaimer.
b.
Review.
c.
Adverse.
Chapter 15 - Audit Reports on Financial Statements
d.
Unqualified with explanatory language.
76. In which one of the following instances would an auditor most likely issue an adverse opinion?
a.
Management declines to present earnings per share in the income statement.
b.
There is substantial doubt about the entity's ability to continue as a going concern.
c.
There is a material dollar misstatement that overshadows the overall financial statements.
d.
The client does not allow the auditor to send confirmations to its three largest customers.
77. When an auditor is faced with a material departure from GAAP that is pervasive, which of the following
should the audit report contain?
a.
An unqualified opinion.
b.
A qualified opinion with an explanatory paragraph.
c.
An adverse opinion.
d.
A disclaimer of opinion.
78. In which of the following circumstances would an auditor be most likely to express an adverse opinion on a
company’s financial statements?
a.
The client has had significant transactions with related entities that the auditor wants to emphasize.
b.
The financial statements are not in conformity with FASB requirements regarding the capitalization
of leases.
c.
The auditor is not independent.
d.
There is substantial doubt about the entity’s ability to continue as a going concern.
Chapter 15 - Audit Reports on Financial Statements
79. When an auditor issues an adverse opinion, which of the following should be included in the opinion
paragraph?
a.
The financial statement effects of the departure from GAAP.
b.
A statement that indicates that the financial statements are fairly stated except for a reason that is
described in the separate paragraph.
c.
A reference to a separate paragraph that describes the reason for the adverse opinion.
d.
The reasons that the financial statements are misleading.
80. In which one of the following instances would an auditor most likely issue a disclaimer of opinion?
a.
Management will not sign a management representation letter.
b.
Management declines to provide a statement of cash flow.
c.
The auditor is independent of the client.
d.
The auditor is unable to confirm receivables but performs alternative procedures.
81. In which one of the following instances would an auditor not issue a disclaimer of opinion?
a.
The auditors are not invited to the periodic inventory at year end.
b.
There are significant misstatements in the financial statements.
c.
There is a significant limitation on the scope of the engagement.
d.
There is insufficient evidence for the auditor to form an opinion on the fairness of the financial
statements.
Chapter 15 - Audit Reports on Financial Statements
82. When an auditor lacks independence with respect to a client, which of the following should the auditor
issue?
a.
A disclaimer of opinion.
b.
An adverse opinion.
c.
A qualified opinion with explanatory paragraph.
d.
An unqualified opinion.
83. When the auditor is not independent with respect to a client, what must the auditor do?
a.
Not accept an audit engagement.
b.
Include a separate paragraph in the audit report stating the lack of independence.
c.
Provide a review report.
d.
Report the non-compliance to the AICPA.
84. Disclaimers of opinion can only be issued by auditors based on which of the following?
a.
Violations of GAAP.
b.
Substantial scope limitations.
c.
Going concern.
d.
Lack of independence.
e.
Either B or D.
85. Scope limitations resulting in disclaimers under U.S. auditing standards affect the standard audit report
through which of the following?
Chapter 15 - Audit Reports on Financial Statements
a.
Modifying the introductory paragraph
b.
Eliminating the scope paragraph.
c.
Adding an explanatory paragraph before the disclaimer paragraph.
d.
Both B and C.
e.
All of the above.
86. A justified departure from GAAP may result in which of the following?
a.
A disclaimer of an audit opinion.
b.
An unqualified audit opinion with an explanatory paragraph either before or after the opinion
paragraph.
c.
An adverse opinion.
d.
A qualified opinion.
87. A justified departure from GAAP may result in which of the following?
a.
A disclaimer of an audit opinion.
b.
An adverse opinion.
c.
An unqualified audit opinion with an explanatory paragraph before the opinion paragraph or a
qualified opinion.
d.
A standard unqualified opinion.
88. An emphasis of a matter may result in which of the following?
a.
A disclaimer of an audit opinion.
b.
A qualified audit opinion.
Chapter 15 - Audit Reports on Financial Statements
c.
An adverse opinion.
d.
An unqualified audit opinion with an explanatory paragraph either before or after the opinion
paragraph.
89. A reference to another auditor under U.S. auditing standards may result in which of the following?
a.
A disclaimer of an audit opinion.
b.
A qualified audit opinion.
c.
An adverse opinion.
d.
An unqualified audit opinion with modified wording for all three paragraphs.
90. When might an auditor modify the introductory paragraph and replace the scope paragraph with explanatory
paragraph?
a.
When a scope limitation exists.
b.
When there is substantial doubt about going-concern.
c.
When the auditor lacks independence.
d.
When there is an emphasis of a matter.
91. PCAOB Auditing Standard 5 does not identify which of the following situations as one in which the auditor
will modify the audit report on ICFR effectiveness?
a.
When there is a restriction on the scope of the engagement.
b.
When there is other information contained in management's annual report on ICFR.
c.
When elements of management's annual report on internal control are incomplete or improperly
presented.
d.
When the annual report includes a copy of the annual certification pursuant to Section 302 of the
Chapter 15 - Audit Reports on Financial Statements
Sarbanes-Oxley Act.
92. When there is a restriction on the scope of the internal control over financial reporting (ICFR) engagement,
what should the auditor do?
a.
The auditor will either withdraw from the engagement or disclaim an opinion.
b.
The auditor will issue an adverse opinion.
c.
The auditor will issue an opinion on the ICFR based on another audit firm’s work.
d.
The auditor will report this directly to the Treadway Commission.
93. In which of the following situations would the auditor modify the audit report on ICFR?
a.
When the auditor relies on the work of other auditors but decides not to include a reference to the
other auditors.
b.
When the auditor is unable to perform all procedures needed to evaluate the internal controls.
c.
When the auditor concludes that management’s report on ICFR is not complete or is improperly
presented.
d.
When the auditor identifies multiple unrelated significant deficiencies in ICFR.
94. When management chooses to include information in its report on ICFR that is in addition to the
information required to be provided, what should the auditor do?
a.
The auditor must endorse the information.
b.
The auditor must include the information as part of the opinion.
c.
The auditor will disclaim an opinion on that additional information.
d.
The auditor will present the information in a separate schedule in the footnotes.
Chapter 15 - Audit Reports on Financial Statements
95. Types of Audit Opinions
What are the five basic types of financial statement audit reports?
1. Standard unqualified report
2. Unqualified report with an explanatory paragraph
3. Qualified report
4. Adverse report
5. Disclaimer of opinion report
POINTS:
1
LEARNING OBJECTIVES:
AUDT.JOHN.16.15-01 - LO: 15-01
NATIONAL STANDARDS:
United States - BUSPORG: Analytic
United States - BUSPROG: Communication
STATE STANDARDS:
United States - AK - AICPA BB-Critical thinking
TOPICS:
Audit Reporting Principles
96. Types of Audit Opinions
Aloe Products is an online retailer of lotions and other beauty supplies. The company records revenues at the
time that the customer orders are placed on the website, rather than when goods are shipped. Goods are
typically shipped two days after the order is places. The auditor determines that the amount of orders placed but
not shipped as of the balance sheet date is not material.
REQUIRED:
Which type of audit report would you suggest be issued and why?
97. Types of Audit Opinions
A CPA, engaged in the audit of financial statements of a large manufacturer with branch offices that are widely
dispersed, is not able to count the substantial undeposited cash receipts at the close of business on the last day of
the fiscal year at all branches. As an alternative to this procedure to verify the accurate cutoff of cash receipts,
Chapter 15 - Audit Reports on Financial Statements
the CPA observes that deposits in transit as shown on the year-end bank reconciliation appeared as credits on
the bank statement on the first business day of the New Year. Based on this, the auditor was satisfied as to the
cutoff of cash receipts.
REQUIRED:
Which type of audit report would you suggest be issued this year and why?
98. Unqualified audit reports
For each of the following situations, define the type of problem encountered and provide an explanation as to
the type of report which was issued.
Situation
Report Issued
The auditor is unable to confirm three
customer accounts receivable.
Unqualified Standard
The client forgot to accrue a contingent
liability.
Unqualified Standard
The auditor believes there is substantial
doubt regarding the client's ability to
continue as a going concern.
Unqualified with Explanatory Paragraph
The client properly adopts a new
accounting principle promulgated by the
FASB
Unqualified with Explanatory Paragraph
Chapter 15 - Audit Reports on Financial Statements
99. Unqualified reports
Under what circumstances would an auditor issue an unqualified opinion modified by an explanatory
paragraph? Would the paragraph go before or after the opinion paragraph?
100. Types of Audit Opinions
A CPA has completed an audit of the financial statements of a long-haul trucking company for the year ended
December 31, 2014. Prior to 2014, the company depreciated its trucks over 10 years. However, during 2014, the
company determined that a more realistic estimated life for its trucks was 8 years and computed the 2014
depreciation on the basis of the revised estimate. The CPA is satisfied that the 8 year estimate is reasonable, but
the change will have a material effect on the comparability of the company’s financial statements. The company
adequately disclosed the change in estimated useful lives of its trucks and the effect of the change on 2014
income in a note to the financial statements.
REQUIRED:
Which type of audit report would you suggest be issued on the 2014 financial statements and why?
Chapter 15 - Audit Reports on Financial Statements
101. Types of Audit Opinions
Bacon, CPAs, is the principal auditor for Martin Industries, a U.S. public company. However, Bacon decides to
refer to the work of Hsu and Wen, CPAs, who audited a wholly owned subsidiary of the entity and issued an
unqualified opinion.
REQUIRED:
Which type of audit report would you suggest be issued this year and why?
102. Types of Audit Opinions
1.
4.
6.
There is substantial doubt about the client's ability to continue as a going concern.
1.
client imposed scope limitation).
Chapter 15 - Audit Reports on Financial Statements
5.
6.
POINTS:
1
LEARNING OBJECTIVES:
AUDT.JOHN.16.15-03 - LO: 15-03
AUDT.JOHN.16.15-06 - LO: 15-06
NATIONAL STANDARDS:
United States - BUSPORG: Analytic
United States - BUSPROG: Communication
STATE STANDARDS:
United States - AK - AICPA BB-Critical thinking
TOPICS:
Qualified Audit Reports
Audit Reports with a Disclaimer of Opinion
103. Qualified opinions
Under what circumstances would an auditor issue a qualified opinion?
104. Types of Audit Opinions
On January 2, 2014, the Zoom Detail Shoppe received notice from its primary supplier that all wholesale prices
were being increased by 10%, effective immediately. Based on this notice, Zoom revalued is December 31,
2013 inventory to reflect the higher costs. The inventory is a large proportion of the total assets. The effect of
the revaluation was material to current assets, but not to total assets or net income. The increase is adequately
Chapter 15 - Audit Reports on Financial Statements
disclosed in the footnotes.
REQUIRED:
Which type of audit report would you suggest be issued this year and why?
105. Types of Audit Opinions
Subsequent to the date of the financial statements, as part of post-balance sheet date audit procedures, a CPA
learned that a recent fire caused significant damage to one of the client’s two manufacturing facilities. However,
the loss will not be reimbursed by insurance. Newspapers in the area describe the event in detail and the event is
widely known. The financial statements and related notes as prepared by the client did not disclose the fire loss.
REQUIRED:
Which type of audit report would you suggest be issued this year and why?
106. Types of Audit Opinions
For the past five years, Clark CPAs has audited the financial statements of a manufacturing company. During
this period, the audit scope was limited by the client as to the observation of the annual physical inventory.
Because Clark CPAs considers the inventories to be material and was not able to satisfy the audit requirements
by using other auditing procedures, the firm was unable to express an unqualified opinion on the financial
statements in each of the five years.
The CPA was allowed to observe physical inventories for the current year ended December 31, 2014, because
the client’s bank would no longer accept the audit reports. However, to minimize audit fees, the client requested
that the CPA not extend audit procedures to the inventory as of the beginning of the year, January 1, 2014.
Chapter 15 - Audit Reports on Financial Statements
REQUIRED:
Which type of audit report would you suggest be issued this year and why?
107. Adverse opinions
Under what circumstances would an auditor issue an adverse opinion?
108. Disclaimers
Discuss what a disclaimer is, when it is issued, and how it would affect the format of a standard three paragraph
audit report.
Chapter 15 - Audit Reports on Financial Statements
109. Types of Audit Opinions
During the course of an audit of the financial statements of Glover Industries, a CPA is refused permission to
inspect the minutes from the board of directors meetings. The CPA is instead offered a certified copy of all
resolutions and actions involving accounting matters.
REQUIRED:
Which type of audit report would you suggest be issued this year and why?