AUD 5

Question 1

A report on internal control over compliance will include which of the following assertions?

1. An opinion as to whether internal controls were adequate to provide reasonable assurance that the organization would comply, in all material respects, with laws, rules and regulations
2. A disclaimer of opinion on internal control over compliance
3. Identification of a material weakness when an adverse opinion is expressed
4. Disclaimer of opinion in the event that significant weaknesses are identified

Answer 1

Choice “2” is correct. The audit opinion states that the audit was conducted in order to express an opinion on compliance but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance.
Choice “1” is incorrect. The audit opinion states that the audit was conducted in order to express an opinion on compliance but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance.
Choice “3” is incorrect. Material weaknesses are identified as part of the report on internal control over compliance. No opinion on internal control over compliance (unqualified or adverse) is expressed.
Choice “4” is incorrect. The report disclaims an opinion on the effectiveness of internal control over compliance regardless of the status of reported weaknesses. Significant weaknesses are disclosed or referenced in a separate report.

Question 2

In auditing a not-for-profit entity that receives governmental assistance, the auditor has a responsibility to:

1. Issue a separate report that describes the expected benefits and related costs of the auditor’s suggested changes to the entity’s internal controls
2. Assess whether management has identified laws and regulations that have a direct and material effect on the entity’s financial statements
3. Notify the governmental agency providing financial assistance that the audit is not designed to provide assurance of detecting errors and fraud
4. Render an opinion concerning the entity’s continued eligibility for the governmental financial assistance

Answer 2

Choice “2” is correct. The auditor must assess whether management has identified laws and regulations that have a direct and material effect on the determination of amounts in an entity’s financial statements and obtain an understanding of the possible effects on the financial statements of such laws and regulations.
Choice “1” is incorrect. The auditor must issue a separate report on the consideration of the entity’s internal control, not on the expected benefits and related costs.
Choice “3” is incorrect. Government Auditing Standards (the Yellow Book) specify that the auditor should design the audit to provide reasonable assurance that material errors and fraud are detected.
Choice “4” is incorrect. The auditor may be required to express an opinion on whether the entity has complied with the requirements applicable to its major federal financial assistance programs, but not whether it is still eligible to receive assistance.

Question 3

In which of the following situations will a practitioner disclaim an opinion on an examination of prospective financial statements?

1. The prospective financial statements depart from the AICPA presentation guidelines
2. The practitioner was not able to perform certain procedures deemed necessary
3. The prospective financial statements fail o disclose significant assumptions
4. The significant assumptions do not provide a reasonable basis for the statements

Answer 3

Choice “2” is correct. A practitioner would disclaim an opinion when facing a scope limitation, such as the inability to perform certain procedures deemed necessary.

Choice “1” is incorrect. A practitioner would issue a qualified or adverse opinion if the prospective financial statements departed from AICPA guidelines.

Choice “3” is incorrect. A practitioner would issue an adverse opinion if the prospective financial statements failed to disclose significant assumptions.

Choice “4” is incorrect. A practitioner would issue an adverse opinion if the significant assumptions did not provide a reasonable basis for the statements.

Question 4

In which case might an auditor of an issuer render a qualified opinion on internal control?

I. When there is a scope limitation
II. When there is material weakness

1. I only
2. II only
3. Both I and II
4. Neither I and II

Answer 4

Choice “4” is correct. A scope limitation requires the auditor to disclaim an opinion or withdraw from the engagement, and a material weakness in internal control requires the auditor to issue an adverse opinion. Neither situation would result in a qualified opinion.
Choice “1” is incorrect. A scope limitation requires the auditor to disclaim an opinion or withdraw from the engagement.
Choice “2” is incorrect. A material weakness in internal control requires the auditor to issue an adverse opinion.
Choice “3” is incorrect. A scope limitation requires the auditor to disclaim an opinion or withdraw from the engagement, and a material weakness in internal control requires the auditor to issue an adverse opinion. Neither situation would result in a qualified opinion.