Ch 3 - Audit Reports

Question 1

a) Which of the following is not a required element of a standard unqualified audit report issued in accordance with AICPA auditing standards?
(1) A title that emphasizes the report is from an independent auditor.
(2) The signature of the engagement partner.
(3) The city and state of the audit firm issuing the report
(4) A statement explaining management’s responsibilities for the financial statements.

Answer 1

(2) The signature of the engagement partner.

Question 2

The date of the CPA’s opinion on the financial statements of the client should be the date of the

(1) closing of the client’s books.
(2) finalization of the terms of the audit engagement.
(3) completion of all important audit procedures.
(4) submission of the report to the client.

Answer 2

(3) completion of all important audit procedures.

Question 3

c) If a principal auditor decides to refer in his or her report to the audit of another auditor, he or she is required to disclose the
(1) name of the other auditor
(2) nature of the inquiry into the other auditor’s professional standing and extent of the review of the other auditor’s work
(3) portion of the financial statements audited by the other auditor.
(4) reasons for being unwilling to assume responsibility for the other auditor’s work.

Answer 3

(3) portion of the financial statements audited by the other auditor.

Question 4

a) An entity changed from the straight-line method to the declining-balance method of depreciation for all newly acquired assets. This change has no material effect on the current year’s financial statements but is reasonably certain to have a substantial effect in later years. If the change is disclosed in the notes to the financial statements, the auditor should issue a report with a(an)
(1) qualified opinion
(2) unqualified opinion with explanatory paragraph
(3) unqualified opinion
(4) qualified opinion with explanatory paragraph regarding consistency

Answer 4

(3) unqualified opinion

Question 5

b) When the financial statements are fairly stated but the auditor concludes there is substantial doubt whether the client can continue in existence, the auditor should issue a(n)
(1) adverse opinion
(2) qualified opinion only
(3) unqualified opinion
(4) unqualified opinion with explanatory paragraph.

Answer 5

(4) unqualified opinion with explanatory paragraph.

Question 6

c) The auditor’s report contains the following: “We did not audit the financial statements of EZ, Inc., a wholly owned subsidiary, which statements reflect total assets and revenues constituting 27 percent and 29 percent, respectively, of the consolidated totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for EZ, Inc., is based solely on the report of the other auditors.” These sentences
(1) indicate a division of responsibility.
(2) assume responsibility for the other auditor
(3) require a departure from an unqualified opinion
(4) are an improper form of reporting

Answer 6

(1) indicate a division of responsibility.

Question 7

a) The annual audit of Midwestern Manufacturing revealed that sales were accidentally being recorded as revenue when the goods were ordered, instead of when they were shipped. Assuming the amount in question is material and the client is unwilling to correct the error, the CPA should issue:
(1) an unqualified opinion or adverse opinion
(2) a qualified “except for” opinion or disclaimer of opinion
(3) a qualified “except for” opinion or adverse opinion
(4) an unqualified opinion with an explanatory paragraph

Answer 7

(3) a qualified “except for” opinion or adverse opinion

Question 8

b) Under which of the following circumstances would a disclaimer of opinion not be appropriate?
(1) The auditor is unable to determine the amounts associated with an employee fraud scheme.
(2) Management does not provide reasonable justification for a change in accounting principles
(3) The client refuses the auditor permission to confirm certain accounts receivable or apply alternative procedures to verify their balances.
(4) The chief executive officer is unwilling to sign the management representation letter.

Answer 8

(2) Management does not provide reasonable justification for a change in accounting principles

Question 9

c) The opinion paragraph of a CPA’s report states: “In our opinion, except for the effects of not capitalizing lease obligations, as discussed in the preceding paragraph, the financial statements presented fairly, in all material respects…” This paragraph expresses a(n)
(1) unqualified opinion
(2) unqualified opinion with explanatory paragraph
(3) qualified opinion
(4) adverse opinion

Answer 9

(3) qualified opinion

Question 10

What are the 8 parts of a Standard Unqualified Audit report for Non-Public Entities?

Answer 10

1. T…report Title
2. A…audit Address
3. I…Introductory paragraph
4. M…Management’s responsibility
5. A…Auditor’s responsibility
6. O…Opinion paragraph
7. N…Name and address of CPA firm
8. D…audit report Date