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Flashcards in Chapter 1 Set 2 Deck (20)
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1
Q

What events would cause an auditor to issue a report that omits any reference to consistency?

A

A change in accounting estimate (such as a change in the useful life of a depreciable asset) is accounted for prospectively and does not affect the comparability of financial statements between periods

2
Q

What are examples of mitigating risk factors?

A
  • postponement of expenditures (including R&D)
  • plans to dispose of assets
  • plans to borrow money or restructure debt
  • plans to increase ownership equity (sell stock)
3
Q

An auditor who is unable to form an opinion on a new client’s opening inventory balances may issue an unmodified opinion on the current year’s?

A

Closing balance sheet only, (note that the auditor will issue a disclaimer of opinion on the statements of income, retained earnings and cash flows)

4
Q

What statement is a basic element of the auditor’s report under U.S. auditing standards?

A

Under U.S. auditing standards, the auditor’s audit report includes a statement that “An audit includes evaluating…significant estimates made by management…”

5
Q

An auditor may not issue a qualified opinion when?

A

The auditor lacks independence with respect to the audited entity

6
Q

An auditor most likely would express an unmodified opinion and would not add emphasis-of-matter or other-matter paragraphs to the report if the auditor?

A

Believes that there is a probable likelihood of a material loss resulting from an uncertainty that is sufficiently supported and disclosed

7
Q

Under GAAS, concerning the unmodified audit opinion, it requires what?

A

Auditor’s Responsibility Paragraph

8
Q

Under GAAP, concerning the unmodified audit opinion, it requires what?

A

Management’s Responsibility Paragraph and Opinion Paragraph

9
Q

What does an Unmodified Opinion state?

A

That financial statements present fairly, in all material respects, the financial position, results of operations, and cash flows on the entity in conformity with applicable financial reporting framework

10
Q

When should an auditor’s report be modified?

A

1) the auditor concludes that the financial statements as a whole are materially misstated (GAAP)
2) the auditor is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements as a whole are free from material misstatement (GAAS)

11
Q

What is a qualified opinion?

A

(both GAAP and GAAS) States that except for the effects of the matter to which qualification relates, the financial statements present fairly, in all material respects, the financial position, results of operations, and cash flows of the entity in conformity with the applicable financial reporting framework

12
Q

What is an adverse opinion?

A

(GAAP) states that the financial statements do not present fairly the financial position, results of operations, or cash flows of the entity in conformity with the applicable financial reporting framework

13
Q

What is a disclaimer of opinion?

A

(GAAS) states that the auditor does not express an opinion on the financial statements because the auditor was not able to obtain sufficient appropriate audit evidence to provide a basis for an opinion

14
Q

When does an auditor use an emphasis-of-matter paragraph?

A
  • going concern
  • consistency
  • changing prior opinion
  • special purpose framework
    Must be placed immediately after the opinion paragraph
15
Q

Why is an emphasis-of-matter paragraph used?

A

It is used when referring to a matter that is appropriately disclosed in the financial statements and is of such importance that it is fundamental to the users’ understanding of the financial statements

16
Q

Why is an other-matter paragraph used?

A

It refers to matters other than those presented or disclosed in the financial statements that are relevant to the user’s understanding of the audit, the auditor’s responsibilities, or the auditor’s report

17
Q

What is a disclaimer of opinion?

A

A disclaimer of opinion means that the auditor was unable to obtain sufficient appropriate audit evidence to provide a reasonable basis for an opinion

18
Q

When inadequate disclosure has a material but not pervasive effect on the financial statements, the auditor’s opinion should state what?

A

“In our opinion, except for the omission of the information described in the Basis for Qualified Opinion paragraph…”

19
Q

What phrase should an emphasis-of-matter paragraph contain if an auditor has doubt in a company’s going concern?

A

“substantial doubt about its (the entity’s) ability to continue as a going concern”

20
Q

When another auditor performs a substantial portion of the audit, and when the group engagement partner makes reference to the audit of another auditor (component auditor), the report should indicate what?

A

a division of responsibility