Chapter 17

Question 1

Adverse opinion

Answer 1

An opinion that the financial statements do not fairly present financial position, results of operations, and cash flows in conformity with generally accepted accounting principles. This situation occurs when the auditors believe that departures from GAAP are both material and pervasive.

Question 2

Basis for modification paragraph

Answer 2

A paragraph added to a report with a modified opinion (qualified, adverse, or disclaimer) that provides a description of the matter giving rise to the modification. The paragraph should be placed immediately before the opinion paragraph in the auditors’ report and use the heading “Basis for Qualified Opinion,” “Basis for Averse Opinion,” or “Basis for Disclaimer of Opinion,” as appropriate.

Question 3

Change in accounting principle

Answer 3

Changes in accounting principles and reporting entities result in an emphasis-of-matter paragraph being added to the auditors’ report.

Question 4

Comparative financial statements

Answer 4

A complete set of financial statements for one or more prior periods included for comparison with the financial statements of the current period.

Question 5

Component (of a financial statement)

Answer 5

An entity or business activity for which group or component management prepare financial information that is required by the applicable financial reporting framework to be included in group financial statements.

Question 6

Component auditors

Answer 6

Auditors that audit one or more components of a group of entities that provide consolidated financial statements. In the PCAOB standards, component auditors are referred to as other auditors.

Question 7

Disclaimer of opinion

Answer 7

A form of report in which the auditors state that they do not express an opinion on the financial statements.

Question 8

Emphasis-of-matter paragraph

Answer 8

A paragraph included in the auditors’ report that is required by GAAS or is included at the auditors’ discretion, and that refers to a matter appropriately presented or disclosed in the financial statements that, in the auditors’ judgment, is of such importance that it is fundamental to users’ understanding of the financial statements (e.g., a lack of consistent application of GAAP, substantial doubt about an entity’s ability to continue as a going concern).

Question 9

Explanatory paragraph

Answer 9

A paragraph inserted in an auditors’ report to explain a matter or to describe the reasons for giving an opinion that is other than unmodified. This term is still used in PCAOB standards, but has been replaced in AICPA standards by an emphasis-of-matter paragraph and an other-matter paragraph.

Question 10

Financial reporting framework

Answer 10

A set of criteria used to determine measurement, recognition, presentation, and disclosure of all material items appearing in the financial statements: for example, accounting principles generally accepted in the United States of America, International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB), or a special-purpose framework (discussed in Chapter 19). An “applicable financial reporting framework” is the framework adopted by management of the company being audited in a particular situation.

Question 11

General-purpose framework

Answer 11

A financial reporting framework designed to meet the common financial information needs of a wide range of users (e.g., GAAP, International Financial Reporting Standards).

Question 12

Group auditors

Answer 12

Auditors that are responsible for issuing the audit report on a group of companies (e.g., a parent and its subsidiaries). In the PCAOB standards, group auditors are referred to as the principal auditors.

Question 13

Material

Answer 13

Being of substantial importance. Significant enough to affect evaluations or decisions by users of financial statements. Information that should be disclosed in order for the financial statements to constitute a fair presentation. Determining what is material involves both quantitative and qualitative criteria.

Question 14

Modified opinion

Answer 14

A qualified opinion, an adverse opinion, or a disclaimer of opinion.

Question 15

Other-matter paragraph

Answer 15

A paragraph included in the auditors’ report that is required by GAAS or is included at the auditors’ discretion, and that refers to a matter other than those presented or disclosed in the financial statements that, in the auditors’ judgment, is relevant to users’ understanding of the audit, the auditors’ responsibilities, or the auditors’ report.

Question 16

Pervasive

Answer 16

A term used, in the context of misstatements, to describe the effects on the financial statements of misstatements or the possible effects on the financial statements of misstatements, if any, that are undetected due to an inability to obtain sufficient appropriate audit evidence. Pervasive effects on the financial statements are those that, in the auditors’ judgment:
Are not confined to specific elements, accounts, or items of the financial statements.
If confined, represent or could represent a substantial proportion of the financial statements.
In relation to disclosures, are fundamental to users’ understanding of the financial statements.

Question 17

Principal auditors

Answer 17

The term previously used by the AICPA to describe the group auditors. This term is still used in PCAOB standards.

Question 18

Qualified opinion

Answer 18

A modification of the auditors’ standard report, employing a clause such as except for to limit the auditors’ opinion on the financial statements. A qualified opinion indicates that, except for the effects of some limitation on the scope of the audit or some departure from generally accepted accounting principles, the financial statements are fairly presented.

Question 19

Scope limitation

Answer 19

A restriction that prevents the auditors from being able to apply all of the audit procedures that they consider necessary in the circumstances. Scope limitations may be client imposed or may be imposed by other circumstances.

Question 20

Shared responsibility opinion

Answer 20

An auditors’ report in which the principal auditors decide to share responsibility with other auditors who have audited some segment of the client’s business. The sharing of responsibility is done by making reference to the other auditors. Making reference is not, in itself, a qualification of the auditors’ report.

Question 21

Standard report

Answer 21

An audit report with (1) an unmodified (unqualified) opinion and (2) no additional matters emphasized (e.g., a change in according principles) beyond the information required in all audit reports. Note that while this term is frequently used in practice, the AICPA no longer formally uses it in its standards.

Question 22

Unmodified opinion

Answer 22

The opinion expressed by the auditors when they conclude that the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework (e.g., GAAP).