Unit 11 - Reporting on the Audit

Question 1

What are the two scenarios that would cause auditors to modify the opinion for both private and public company clients?

Answer 1

1. The auditor concludes the financial statements are not presented fairly in accordance with the applicable financial reporting framework because of one or more material misstatements. Essentially, the client has departed from accounting standards and will not or cannot correct the departure.
2. The auditor is not able to gather sufficient appropriate audit evidence to draw a conclusion about the fair presentation of the financial statements. In other words, the auditor cannot complete some portion of the planned audit procedures. This is referred to as a scope limitation.

Question 2

What is an auditor stating when they issue a qualified opinion?

Answer 2

In a qualified opinion, auditors are stating the financial statements are fairly presented except for a material departure from the applicable financial reporting framework.

Auditors use their professional judgment to determine if a material misstatement is pervasive. If a misstatement is material, but not pervasive, a qualified opinion is issued.

Question 3

What is an auditor stating when they issue an adverse opinion?

Answer 3

If a misstatement is material and pervasive, an adverse opinion is issued.

In an adverse opinion, auditors are stating the financial statements are not presented fairly due to one or more pervasively material departures from the applicable financial reporting framework.

Question 4

When an auditor is evaluating the consistency of the financial statements, they must evaluate whether comparability between periods have been affected by what two matters?

Answer 4

1) A change in accounting principle

2) Adjustments to correct a material misstatement in previously issued F/S

Question 5

In a public company audit, the audit report is addressed to the:

Answer 5

board of directors and shareholders

Question 6

When the audit opinion is based in part on the work of another auditor, what is included to the standard unmodified audit report?

Answer 6

The auditor’s responsibility paragraph has added working, stating that other auditors completed a portion of the audit.

Question 7

If auditors identify only one material weakness in a client’s internal control system, the appropriate report to issue is a(n):

Answer 7

adverse opinion

Question 8

If a client has a going concern issue that has been properly disclosed in the notes, the auditor should issue a(n) _________ report and add an emphasis-of-matter paragraph _______ the opinion paragraph to highlight the going concern issue

Answer 8

unmodified report

after

Question 9

An emphasis-of-matter paragraph is used with an unmodified opinion when:

Answer 9

a significant uncertainty exists that should be brought to the financial statements user’s attention

Question 10

Companies typically present their financial statements in comparative form, which means showing:

Answer 10

two consecutive years of balances sheets

three consecutive years of the income statement, statement of cash flows, and statement of stockholders’ equity

Question 11

The dual dating of an audit report means:

Answer 11

the auditor’s performed audit procedures regarding a specific event that was after the end of fieldwork.

Question 12

The date of the auditor’s report should be:

Answer 12

the date of completion of fieldwork.

Question 13

If management revises the financial statements due to subsequently discovered facts, auditors should:

Answer 13

perform audit procedures on the changes made by management

Question 14

When would an auditor issue a disclaimer of opinion?

Answer 14

A disclaimer of opinion is issued when there is a scope limitation that is both material and pervasive.

Question 15

If an auditor needs to describe the portion of work performed by another auditor in the audit report, what measure is appropriate?

Answer 15

Dollar amount of assets

Question 16

When would an auditor express an unmodified opinion?

Answer 16

When the auditor concludes the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework.

Question 17

Define CAM.

Answer 17

CAM = critical audit matter

Any audit matter that was communicated to or required to be communicated to the audit committee.

The PCAOB added a standard for audit reports of public companies beginning with fiscal years ending on or after June 30, 2019 that CAMs must be included.

In the IAASB, it is KAM = Key Audit Matter

Question 18

What is the difference between the title of an audit report for a private company vs a public company?

Answer 18

Private company = Independent Auditor’s Report

Public company = Report of Independent Registered Public Accounting Firm

Both must say independent because independence is required for both types of audit. The Public company title includes registered because the auditor must be registered with the PCAOB to perform the audit of a public company.

Question 19

What is the difference between the description of the audit in an audit report for a private company vs a public company?

Answer 19

The primary difference between both descriptions involves internal controls.

In a private company audit, the auditor does not express an opinion on the effectiveness of internal controls, but the auditor does express an opinion on internal controls in a public company audit.

Question 20

What should the auditor do if the client refuses to properly disclose a material change in accounting principle or the material change is not justifiable as dictated by the applicable financial reporting framework?

Answer 20

The auditor should modify the opinion for a material departure from the financial reporting framework.

Question 21

Can the name of the component audit firm be used in the audit report of the group financial statements?

Answer 21

The name of the component auditor is typically not stated in the audit report, but it is allowed. If the group engagement partner wants to name the component audit firm, then they must receive permission from the component auditor, and the component auditor’s report on the subsidiary must be presented together with the auditor’s report on the group financial statements.

Question 22

When is a qualified opinion issued?

Answer 22

When a scope limitation or a departure from financial reporting framework is material, but not pervasive.

Question 23

When is a disclaimer of opinion issued?

Answer 23

Auditors provide no opinion on the financial statements due to a pervasively material scope limitation or lack of independence from the client.

Question 24

Where is the qualified opinion paragraph inserted in the audit report?

Answer 24

Before the opinion paragraph

Question 25

Where is the basis for disclaimer of opinion paragraph inserted in the audit report?

Answer 25

Before the opinion paragraph

Question 26

What opinion should an auditor issue if there is a departure from the financial reporting framework that is material but not pervasive?

Answer 26

Qualified opinion

Question 27

What opinion should an auditor issue if there is a departure from the financial reporting framework that is material and pervasive?

Answer 27

Adverse opinion

Question 28

What opinion should an auditor issue if there is a scope limitation that is material but not pervasive?

Answer 28

Qualified opinion

Question 29

What opinion should an auditor issue if there is a scope limitation that is material and pervasive?

Answer 29

Disclaimer of opinion

Question 30

What opinion should an auditor issue if the auditor is not independent?

Answer 30

Disclaimer of opinion

Question 31

What situation would cause the auditor to issue an adverse opinion on the effectiveness of ICFR?

Answer 31

An auditor would issue an adverse opinon on the effectiveness of ICFR if one or more material weaknesses exist.