Chapter 3

Auditing and Assurance Services, 15e (Arens)
Chapter 3 Audit Reports

Learning Objective 3-1
1) An audit of historical financial statements most commonly includes the:
A) balance sheet, statement of retained earnings, and the statement of cash flows
!) income statement, the statement of cash flows, and the statement of net wor"ing ca#ital
$) statement of cash flows, balance sheet, and the statement of retained earnings
%) balance sheet, income statement, statement of cash flows, and the statement of changes in
stoc"holders& e'uity
Answer: %
(erms: Audit of historical financial statements
%iff: )oderate
Objective: LO 3-1
AA$*!: +eflective thin"ing s"ills
,) Auditing standards re'uire that the audit re#ort must be titled and that the title must:
A) include the word -inde#endent-
!) indicate if the auditor is a $.A
$) indicate if the auditor is a #ro#rietorshi#, #artnershi#, or cor#oration
%) indicate the ty#e of audit o#inion issued
Answer: A
(erms: Auditing standards re'uire audit re#ort title
%iff: /asy
Objective: LO 3-1
1
$o#yright 0 ,112 .earson /ducation, 3nc
3) (o em#hasi4e the fact that the auditor is inde#endent, a ty#ical addressee of the audit re#ort
could be:
A)
$om#any $ontroller *hareholders !oard of %irectors
5o 6es 6es
!)
5o 5o 6es
$)
6es 6es 5o
%)
6es 5o 5o
Answer: A
(erms: Audit re#ort addressee
%iff: /asy
Objective: LO 3-1
2) (he auditor&s res#onsibility section of the standard un'ualified audit re#ort states that the audit
is designed to:
A) discover all errors and7or irregularities
!) discover material errors and7or irregularities
$) conform to generally acce#ted accounting #rinci#les
%) obtain reasonable assurance whether the statements are free of material misstatement
Answer: %
(erms: *co#e #aragra#h of standard un'ualified audit re#ort states
%iff: /asy
Objective: LO 3-1
,
8) (he audit re#ort date on a standard un'ualified re#ort indicates:
A) the last day of the fiscal #eriod
!) the date on which the financial statements were filed with the *ecurities and /9change
$ommission
$) the last date on which users may institute a lawsuit against either client or auditor
%) the last day of the auditor&s res#onsibility for the review of significant events that occurred
after the date of the financial statements
Answer: %
(erms: Audit re#ort date on standard un'ualified re#ort
%iff: /asy
Objective: LO 3-1
:) (he standard audit re#ort for non-#ublic entities refers to ;AA* and ;AA. in which
sections<
A)
;AA* ;AA.
Auditor&s res#onsibility Auditor&s res#onsibility
!)
;AA* ;AA.
Auditor&s res#onsibility 3ntroductory #aragra#h
$)
;AA* ;AA.
)anagement&s res#onsibility
and O#inion #aragra#h
and 3ntroductory #aragra#h
%)
;AA* ;AA.
Auditor&s res#onsibility
and O#inion #aragra#h
Answer: %
(erms: *tandard un'ualified audit re#ort for non-#ublic entities= ;AA* and ;AA.
%iff: )oderate
Objective: LO 3-1
3
>) ?hich of the following is not e9#licitly stated in the standard un'ualified audit re#ort<
A) (he financial statements are the res#onsibility of management
!) (he audit was conducted in accordance with generally acce#ted accounting #rinci#les
$) (he auditors believe that the audit evidence #rovides a reasonable basis for their o#inion
%) An audit includes assessing the accounting estimates used
Answer: !
(erms: *tandard un'ualified audit re#ort
%iff: /asy
Objective: LO 3-1
@) (he standard un'ualified audit re#ort for a non-#ublic entity must:
A) have a re#ort title that includes the word -$.A-
!) be addressed to the com#any&s stoc"holders and creditors
$) be dated
%) include an e9#lanatory #aragra#h
Answer: $
(erms: *tandard un'ualified audit re#ort for a non-#ublic entity=eight #arts of the re#ort
%iff: /asy
Objective: LO 3-1
(o#ic: .ublic
A) (he management&s res#onsibility section of the standard audit re#ort for a non-#ublic
com#any states that the financial statements are:
A) the res#onsibility of the auditor
!) the res#onsibility of management
$) the joint res#onsibility of management and the auditor
%) none of the above
Answer: !
%iff: /asy
Objective: LO 3-1
2
11) (he introductory #aragra#h of the standard audit re#ort for a non-#ublic com#any #erforms
which functions<
3 3t states the $.A has #erformed an audit
33 3t lists the financial statements being audited
333 3t states the financial statements are the res#onsibility of the auditor
A) 3 and 33
!) 3 and 333
$) 33 and 333
%) 3, 33 and 333
Answer: A
(erms: 3ntroductory #aragra#h of standard audit re#ort
%iff: )oderate
Objective: LO 3-1
11) ?hich of the following statements are true for the audit re#ort of a non-#ublic entity<
3 (he introductory #aragra#h states that management is res#onsible for the #re#aration and
content of the financial statements
33 (he sco#e #aragra#h states that the auditor evaluates the a##ro#riateness of accounting
#olicies used and the reasonableness of significant accounting estimates made by management
A) 3 only
!) 33 only
$) 3 and 33
%) 5either 3 nor 33
Answer: !
(erms: 3ntroductory #aragra#h and sco#e #aragra#h
%iff: )oderate
Objective: LO 3-1
1,) (he auditor&s res#onsibility section of the standard audit re#ort states that the auditor is:
A) res#onsible for the financial statements and the o#inion on them
!) res#onsible for the financial statements
$) res#onsible for the o#inion on the financial statements
%) jointly res#onsible for the financial statements with management
Answer: $
%iff: /asy
Objective: LO 3-1
8
13) 3f the balance sheet of a #rivate com#any is dated %ecember 31, ,111, the audit re#ort is
dated Bebruary @, ,11,, and both are released on Bebruary 18, ,11,, this indicates that the
auditor has searched for subse'uent events that occurred u# to:
A) %ecember 31, ,111
!) Canuary 1, ,11,
$) Bebruary @, ,11,
%) Bebruary 18, ,11,
Answer: $
(erms: Audit re#ort subse'uent event dating
%iff: )oderate
Objective: LO 3-1
12) (he a##ro#riate audit re#ort date for a standard non'ualified audit re#ort for a non-#ublic
entity should be the:
A) date the financial statements are given to the !oard of %irectors
!) date of the financial statements
$) date the auditor com#leted the auditing #rocedures in the field
%) :1 days after the date of the financial statements as re'uired by the */$
Answer: $
%iff: )oderate
Objective: LO 3-1
18) )ost auditors believe that financial statements are -#resented fairly- when the statements are
in accordance with ;AA., and that it is also necessary to:
A) determine that they are not in violation of BA*! statements
!) e9amine the substance of transactions and balances for #ossible misinformation
$) review the statements using the accounting #rinci#les #romulgated by the */$
%) assure investors that net income re#orted this year will be e9ceeded in the future
Answer: !
(erms: Binancial statements are #resented fairly in accordance with ;AA.
%iff: $hallenging
Objective: LO 3-1
:
1:) An audit re#ort #re#ared by ;arrett and !rown, $.As, is #rovided below (he audit for the
year ended %ecember 31, ,11, was com#leted on )arch 1, ,113, and the re#ort was issued to
Cavlin $or#oration, a #rivate com#any, on )arch 13, ,113 List any deficiencies in this re#ort
%o not rewrite the re#ort
?e have e9amined the accom#anying financial statements of %alton $or#oration as of
%ecember 31, ,11, (hese financial statements are the res#onsibility of the com#any&s
management
Management's Responsibility for the Financial Statements:
)anagement is res#onsible for the #re#aration and fair #resentation of the financial statements in
accordance with generally acce#ted auditing standards= this includes the design, im#lementation,
and maintenance of internal control relevant to the #re#aration and fair #resentation of financial
statements that are free from all misstatement, whether due to fraud or error
Auditor's Responsibility
Our res#onsibility is to give an o#inion on these financial statements based on our audit ?e
conducted our audits in accordance with auditing standards generally acce#ted throughout the
world(hose standards re'uire that we #lan and #erform the audit to obtain absolute assurance
about whether the financial statements are free of misstatement
An audit involves #erforming #rocedures to obtain audit evidence about the amounts and
disclosures in the financial statements (he #rocedures selected de#end on management&s
judgment, including the assessment of the ris"s of material misstatement of the income
statement, whether due to fraud or error 3n ma"ing those ris" assessments, the auditor considers
internal control relevant to the auditor&s #re#aration and fair #resentation of the financial
statements in order to design audit #rocedures that are a##ro#riate in the circumstances, but not
for the #ur#ose of e9#ressing an o#inion on the effectiveness of the entity&s internal control An
audit also includes evaluating the a##ro#riateness of accounting #olicies and the accuracy of
accounting estimates made by management, as well as evaluating the overall #resentation of the
financial statements
?e believe that the audit evidence we have obtained is sufficient and a##ro#riate to #rovide a
basis for our audit o#inion
Opinion
3n our o#inion, the financial statements referred to above #resent accurately the financial #osition
of Cavlin $or#oration as of %ecember 31, ,11,, in conformity with accounting #rinci#les
generally acce#ted in the Dnited *tates of America
;arrett and !rown, $.As
)arch, ,113
>
Answer: (he audit re#ort contains the following deficiencies:
E (he re#ort title is missing (he title must include the word independent.
E (he audit re#ort address is missing(he re#ort should be addressed to shareholders and the
board of directors
E (he introductory #aragra#h should refer to an -audit,- not an -e9amination-
E (he introductory #aragra#h should list the financial statements that were audited
E (he introductory #aragra#h refers to the wrong com#any
E (he introductory #aragra#h should not state that the financial statements are the
res#onsibility of management (his belongs in the ne9t section- management&s res#onsibility
E (he management&s res#onsibility section should state that the financial statements are in
accordance with -accounting #rinci#les generally acce#ted in the Dnites *tates of America- not
in accordance with generally acce#ted auditing standards-
E (he auditor&s res#onsibility section should state that our res#onsibility is to -e9#ress- an
o#inion, not -give- an o#inion
E (he auditor&s res#onsibility section should state the audit was conducted in accordance with
-auditing standards generally acce#ted in the Dnited *tates of America-, not -throughout the
world-
E (he auditor&s res#onsibility section should state that the audit was #lanned and #erformed to
obtain -reasonable- assurance, not -absolute -assurance
E (he auditor&s res#onsibility section should state that the financial statements are free of
-material misstatements,- not sim#ly -misstatement-
E (he sco#e #aragra#h of the auditor&s res#onsibility section should state that the #rocedures
selected de#end on the -auditor&s- judgment, not -management&s- judgment
E (he sco#e #aragra#h of the auditor&s res#onsibility section should state ris" of material
misstatement in the -financial statements,- not the -income statement-
E (he sco#e #aragra#h of the auditor&s res#onsibility section should state the auditor considers
internal control relevant to management's #re#aration , not the entity's #re#aration
E (he sco#e #aragra#h of the auditor&s res#onsibility section is missing the sentence
-Accordingly, we e9#ress no such o#inion- (his should be #laced right after the second
sentence
E (he sco#e #aragra#h of the auditor&s res#onsibility section should state - reasonableness" of
significant accounting estimates,- not -accurate.-
E (he sco#e #aragra#h should contain the following #hrase: -An audit also includes assessing
the accounting #rinci#les used and significant estimates made by management, as well as
evaluating the overall financial statement #resentation-
E (he auditor&s o#inion section should state that the financial statements #resent -fairly, in all
material respects," not #resent accurately
E (he auditor&s o#inion section should include -and the results of their o#erations and cash
flows for the year then ended-
E (he audit re#ort should be dated )arch 1, ,113
(erms: Audit re#ort deficiencies
%iff: $hallenging
Objective: LO 3-1
AA$*!: Analytic s"ills
@
1>) %escribe the standard un'ualified re#ort to be issued for an audit of a #rivate com#any
!egin by s#ecifying the eight #arts of the re#ort, and then discuss the contents of each #art
Answer: (he #arts of the standard un'ualified re#ort are as follows:
E Report title (he title must include the word -inde#endent- /9am#les of a##ro#riate titles are
-inde#endent auditor&s re#ort,- or -re#ort of inde#endent accountant-
E Report address. (he re#ort is usually addressed to the com#any&s stoc"holders or board of
directors 3t should not be addressed to com#any management
E ntroductory paragraph (his #aragra#h states that an audit was #erformed to distinguish the
re#ort from a com#ilation or review re#ort 3t also lists the financial statements that were audited,
including the notes to the financial statements as well as the balance sheet dates and the
accounting #eriods for the income statement and statement of cash flows (he wording of the
financial statements in the re#ort should be identical to those used by management on the
E Management's Responsibility section (his section states that the statements are the
res#onsibility of management (his res#onsibility includes selecting the a##ro#riate accounting
#rinci#les and maintaining internal control over financial re#orting sufficient for #re#aration of
financial statements that are free of material misstatements due to fraud or error
E Auditor's Responsibility section (his section contains three #aragra#hs:
(he first #aragra#h states that F1) the audit was conducted in accordance with auditing standards
generally acce#ted in the Dnited *tates of America, F,) the audit is designed to obtain reasonable
assurance about whether the statements are free of material misstatement
(he second #aragra#h is called the sco#e #aragra#h and describes the sco#e of the audit and the
evidence accumulated (his #aragra#h indicates that the #rocedures de#end on the auditor&s
judgment and includes an assessment of the ris" of material misstatements in the financial
statements 3t also indicates that the auditor considers internal control relevant to the #re#aration
and fair #resentation of the financial statements in designing the audit #rocedures #erformed, but
this assessment of internal control is not for the #ur#ose and is not sufficient to e9#ress an
o#inion on the effectiveness of the entity&s internal control (he last sentence of the #aragra#h
indicates that the audit includes evaluating the accounting #olicies selected, the reasonableness
of accounting estimates, and the overall financial statement #resentation
(he third #aragra#h indicates the auditor believes that sufficient a##ro#riate evidence has been
obtained to su##ort the auditor&s o#inion
E Opinion paragraph (his #aragra#h states the auditor&s conclusions based on the results of
the audit 3t states that in the auditor&s o#inion the financial statements #resent fairly, in all
material res#ects, the financial #osition of the com#any as of a certain date, and the results of
their o#erations and cash flows for the the yearFs) then ended, in accordance with accounting
#rinci#les generally acce#ted in the Dnited *tates of America
A
E !ame of "#A firm (y#ically, the name of the $.A firm, and not the name of an individual
auditor, is used
E Audit report date (he audit re#ort is normally dated as of the last day of fieldwor"
(erms: *tandard un'ualified audit re#ort for a non-#ublic entity= eight #arts of the re#ort
%iff: $hallenging
Objective: LO 3-1
11
1@) /.), 3nc, is a #rivate manufacturing com#any with a calendar year-end (heir financial
statements include a balance sheet, a statement of income, statement of cash flows, and statement
of stoc"holders& e'uity Bor the most recent audit, Garrington and .erry, LL., audited the ,111
and ,11, financial statements (he auditors com#leted all significant fieldwor" on )arch 8,
,113 and issued the audit re#ort on )arch 1:, ,113
Re$uired:
$onsider all the facts given and write the standard un'ualified auditor&s re#ort, including all eight
sections of the re#ort
Answer: Independent Auditor's Report
(o the !oard of %irectors and *hareholders of /.), 3nc
?e have audited the accom#anying balance sheets of /.), 3nc, as of %ecember 31, ,11, and
,111, and the related statements of income, changes in stoc"holders& e'uity, and cash flows for
the years then ended, and the related notes to the financial statements
Management's Responsibility for the Financial Statements
)anagement is res#onsible for the #re#aration and fair #resentation of the financial statements in
accordance with accounting #rinci#les generally acce#ted in the Dnited *tates of America= this
includes the design, im#lementation, and maintenance of internal control relevant to the
#re#aration and fair #resentation of financial statements that are free from material misstatement,
whether due to fraud or error
Auditor's Responsibility
Our res#onsibility is to e9#ress an o#inion on these financial statements based on our audits ?e
conducted our audits in accordance with auditing standards generally acce#ted in the Dnited
*tates of America (hose standards re'uire that we #lan and #erform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement
An audit involves #erforming #rocedures to obtain audit evidence about the amounts and
disclosures in the financial statements (he #rocedures selected de#end on the auditor&s
judgment, including the assessment of the ris"s of material misstatement of the financial
statements, whether due to fraud or error 3n ma"ing those ris" assessments, the auditor considers
internal control relevant to the entity&s #re#aration and fair #resentation of the financial
statements in order to design audit #rocedures that are a##ro#riate in the circumstances, but not
for the #ur#ose of e9#ressing an o#inion on the effectiveness of the entity&s internal control
Accordingly, we e9#ress no such o#inion An audit also includes evaluating the a##ro#riateness
of accounting #olicies used and the reasonableness of significant accounting estimates made by
management, as well as evaluating the overall #resentation of the financial statements
?e believe that the audit evidence we have obtained is sufficient and a##ro#riate to #rovide a
basis for our audit o#inion
11
Opinion
3n our o#inion, the financial statements referred to above #resent fairly, in all material res#ects,
the financial #osition of /.), 3nc, as of %ecember 31, ,11, and ,111, and the results of their
o#erations and cash flows for the years then ended, in accordance with accounting #rinci#les
generally acce#ted in the Dnited *tates of America
Garrington and .erry, LL.
)arch 8, ,113
(erms: Audit re#ort format for #rivate com#any
%iff: $hallenging
Objective: LO 3-1
1A) An audit #rovides a high level of assurance, but is not a guarantee that a material
misstatement will e9ist in the financial statements
A) (rue
!) Balse
Answer: A
(erms: Audit and reasonable assurance
%iff: )oderate
Objective: LO 3-1
,1) A3$.A auditing standards #rovide uniform wording for the auditor&s re#ort to enable users of
the financial statements to understand the audit re#ort
A) (rue
!) Balse
Answer: A
(erms: Dniform wording for auditor&s re#ort
%iff: /asy
Objective: LO 3-1
,1) Dsers of the financial statements rely on the auditor&s re#ort because of the absolute
assurance the re#ort #rovides
A) (rue
!) Balse
Answer: !
(erms: Dsers of financial statements rely on auditor&s re#ort
%iff: /asy
Objective: LO 3-1
1,
,,) (he introductory #aragra#h of the auditor&s re#ort states that the auditor is res#onsible for the
#re#aration, #resentation and o#inion on financial statements
A) (rue
!) Balse
Answer: !
(erms: 3ntroductory #aragra#h of auditor&s re#ort
%iff: /asy
Objective: LO 3-1
,3) (he audit re#ort date is the date the auditor com#leted audit #rocedures in the field
A) (rue
!) Balse
Answer: A
(erms: Audit re#ort date
%iff: /asy
Objective: LO 3-1
,2) (he sco#e #aragra#h of the auditor&s res#onsibility section of the audit re#ort issued for
financial statements of a non-#ublic com#any should refer to generally acce#ted auditing
standards
A) (rue
!) Balse
Answer: A
(erms: Audit re#orts issued for financial statements of #rivate com#any= *co#e #aragra#h=
;enerally acce#ted auditing standards
%iff: /asy
Objective: LO 3-1
(o#ic: .ublic
,8) 3n the sco#e #aragra#h of the audit re#ort issued for financial statements of a non-#ublic
com#any, the auditor e9#resses an o#inion about the internal controls of the com#any
A) (rue
!) Balse
Answer: !
(erms: Audit re#orts issued for financial statements of #rivate com#any= *co#e #aragra#h=
;enerally acce#ted auditing standards
%iff: /asy
Objective: LO 3-1
13
,:) (he audit re#ort is normally addressed to the com#any&s #resident or chief e9ecutive officer
A) (rue
!) Balse
Answer: !
(erms: Audit re#ort normally addressed
%iff: /asy
Objective: LO 3-1
,>) (he #hrase -generally acce#ted accounting #rinci#les- can be found in the o#inion #aragra#h
of a standard un'ualified re#ort
A) (rue
!) Balse
Answer: A
(erms: ;enerally acce#ted accounting #rinci#les= O#inion #aragra#h of standard un'ualified
re#ort
%iff: /asy
Objective: LO 3-1
,@) (he date of the auditor&s re#ort is indicative of the last day of the auditor&s res#onsibility for
the review of significant events occurring after the balance sheet date
A) (rue
!) Balse
Answer: A
(erms: %ate of auditor&s re#ort indicates auditor&s res#onsibility
%iff: )oderate
Objective: LO 3-1
,A) (he #hrase -auditing standards generally acce#ted in the Dnited *tates of America- can be
found in the o#inion #aragra#h of a standard, un'ualified audit re#ort for a non-#ublic com#any
A) (rue
!) Balse
Answer: !
(erms: Auditing standards generally acce#ted in the Dnited *tates= O#inion #aragra#h in
standard un'ualified re#ort for #ublic com#any
%iff: )oderate
Objective: LO 3-1
(o#ic: .ublic
12
31) (he #hrase -(hose standards re'uire that we #lan and #erform the audit to obtain reasonable
assurance about whether the financial statements are free from material error- is included in the
auditor&s o#inion section of an audit re#ort
A) (rue
!) Balse
Answer: !
%iff: )oderate
Objective: LO 3-1
Learning Objective 3-,
1) 3n which of the following situations would the auditor most li"ely issue an un'ualified re#ort<
A) (he client valued ending inventory by using the re#lacement cost method
!) (he client valued ending inventory by using the 5e9t-3n-Birst-Out F53BO) method
$) (he client valued ending inventory at selling #rice rather than historical cost
%) (he client valued ending inventory by using the Birst-3n-Birst-Out FB3BO) method, but
showed the re#lacement cost of inventory in the 5otes to the Binancial *tatements
Answer: %
(erms: 3ssued audit re#ort= further audit tests or in'uiries
%iff: $hallenging
Objective: LO 3-,
,) (he standard un'ualified audit re#ort:
A) is sometimes called a clean o#inion
!) can be issued only with an e9#lanatory #aragra#h
$) can be issued if only a balance sheet and income statement are included in the financial
statements
%) is sometimes called a disclaimer re#ort
Answer: A
(erms: $onditions for standard un'ualified audit re#ort
%iff: /asy
Objective: LO 3-,
18
3) (here are four conditions that must be met before an auditor can issue a standard un'ualified
re#ort for the audit of a #rivate com#any .lease discuss each of these five conditions
Answer: (he four conditions that justify issuing a standard un'ualified re#ort are:
E All statementsHbalance sheet, income statement, statement of changes in stoc"holder&s e'uity,
and statement of cash flowsHare included in the financial statements
E *ufficient a##ro#riate evidence has been accumulated, and the auditor has conducted the
engagement in a manner that enables him or her to conclude that the audit was #erformed in
accordance with auditing standards
E (he financial statements are #resented in accordance with D* generally acce#ted accounting
#rinci#les or other a##ro#riate accounting framewor" (his also means that ade'uate disclosures
have been included in the footnotes and other #arts of the financial statements
E (here are no circumstances re'uiring the addition of an e9#lanatory #aragra#h or
modification of the wording of the re#ort
(erms: $onditions for standard un'ualified re#ort for audit of #rivate com#any
%iff: )oderate
Objective: LO 3-,
1) ?henever an auditor issues an audit re#ort for a #ublic com#any, the auditor can choose to
issue a re#ort in which of the following forms<
3 A combined re#ort on financial statements and internal control over financial re#orting
33 *e#arate re#orts on financial statements and internal control over financial re#orting
A) 3 only
!) 33 only
$) /ither 3 or 33
%) 5either 3 nor 33
Answer: $
(erms: $ombined re#ort on financial statements and internal control over financial re#orting
%iff: /asy
Objective: LO 3-3
(o#ic: .ublic
1:
,) (he standard un'ualified audit re#ort for #ublic entities includes the following three
#aragra#hs:
A) introductory, sco#e and management&s res#onsibility
!) materiality, sco#e and re#ort
$) introductory, sco#e and o#inion
%) sco#e, fieldwor" and conclusion
Answer: $
(erms: *tandard un'ualified audit re#ort for #ublic entities
%iff: /asy
Objective: LO 3-3
(o#ic: .ublic
3) Auditing standards for #ublic com#anies are established by the:
A) */$
!) BA*!
$) .$AO!
%) 3+*
Answer: $
(erms: Audit standards for #ublic com#anies= .$AO!
%iff: /asy
Objective: LO 3-3
(o#ic: .ublic
2) *ection 212Fb) of the *arbanes O9ley Act re'uires that the auditor of a #ublic com#any attest
to management&s re#ort on the efficiency of internal controls over financial re#orting
A) (rue
!) Balse
Answer: !
(erms: *ection 212Fb) of *arbanes-O9ley Act= 3nternal controls over financial re#orting
%iff: )oderate
Objective: LO 3-3
(o#ic: .ublic
8) Auditors of #ublic com#any financial statements must issue se#arate re#orts on internal
control over financial re#orting
A) (rue
!) Balse
Answer: !
(erms: Auditors issue se#arate re#orts on internal control
%iff: )oderate
Objective: LO 3-3
(o#ic: .ublic
1>
1) /9am#les of un'ualified o#inions which contain modified wording Fwithout adding an
e9#lanatory #aragra#h) include:
A) the use of other auditors
!) material uncertainties
$) substantial doubt about the audited com#any For the entity) continuing as a going concern
%) lac" of consistent a##lication of ;AA.
Answer: A
(erms: )odified un'ualified o#inion
%iff: /asy
Objective: LO 3-2
,) A $.A may wish to em#hasi4e s#ecific matters regarding the financial statements even though
an un'ualified o#inion will be issued 5ormally, such e9#lanatory information is:
A) included in the sco#e #aragra#h
!) included in the o#inion #aragra#h
$) included in a se#arate #aragra#h in the re#ort
%) included in the introductory #aragra#h
Answer: $
(erms: Dn'ualified o#inion with em#hasis on s#ecific matters regarding the financial statements
%iff: /asy
Objective: LO 3-2
3) All of the following are causes for the addition of an e9#lanatory #aragra#h under both A3$.A
and .$AO! standards except for:
A) em#hasis of a matter
!) re#orts involving other auditors
$) lac" of consistent a##lication of generally acce#ted accounting #rinci#les
%) auditor agrees with a de#arture from #romulgated accounting #rinci#les
Answer: !
(erms: Dn'ualified o#inion with modified wording
%iff: /asy
Objective: LO 3-2
1@
2) (he term -e9#lanatory #aragra#h- was re#laced in the A3$.A auditing standards with:
A) going concern #aragra#h
!) em#hasis-of-matter #aragra#h
$) de#arture from #rinci#les #aragra#h
%) consistency #aragra#h
Answer: !
(erms: Dn'ualified o#inion with modified wording
%iff: /asy
Objective: LO 3-2
8) ?hich of the following are changes that affect the com#arability of financial statements but
not the consistency and therefore, do not have to be included in the auditor&s re#ort<
A) /rror corrections not involving #rinci#les
!) $hanges in accounting estimates
$) Iariations in the format and #resentation of financial information
%) All of the above
Answer: %
(erms: $hanges that affect the com#arability of financial statements
%iff: )oderate
Objective: LO 3-2
:) ?hich of the following is least li"ely to cause uncertainty about the ability of an entity to
continue as a going concern<
A) (he entity is suing a com#etitor for a minor #atent infringement
!) (he entity has lost a major customer
$) (he entity has significant recurring o#erating losses
%) (he entity has wor"ing ca#ital deficiencies
Answer: A
(erms: ;oing concern
%iff: )oderate
Objective: LO 3-2
1A
>) ?hen there is uncertainty about a com#any&s ability to continue as a going concern, the
auditor&s concern is the #ossibility that the client may not be able to continue its o#erations or
meet its obligations for a -reasonable #eriod of time- Bor this #ur#ose, a reasonable #eriod of
time is considered not to e9ceed:
A) si9 months from the date of the financial statements
!) one year from the date of the financial statements
$) si9 months from the date of the audit re#ort
%) one year from the date of the audit re#ort
Answer: !
(erms: ;oing concern = time #eriod
%iff: )oderate
Objective: LO 3-2
@) ?hen the auditor concludes that there is substantial doubt about the entity&s ability to continue
as a going concern, the a##ro#riate audit re#ort could be:
3 an un'ualified o#inion with an e9#lanatory #aragra#h
33 a disclaimer of o#inion
A) 3 only
!) 33 only
$) 3 or 33
%) 5either 3 nor 33
Answer: $
(erms: Auditor concludes substantial doubt about entity&s ability to continue as going concern
%iff: )oderate
Objective: LO 3-2
A) ?hen a com#any&s financial statements contain a de#arture from ;AA. with which the
auditor concurs, the de#arture should be e9#lained in:
A) the sco#e #aragra#h
!) an e9#lanatory #aragra#h that a##ears before the o#inion #aragra#h
$) the o#inion #aragra#h
%) an e9#lanatory #aragra#h after the o#inion #aragra#h
Answer: %
(erms: Custified %e#arture
%iff: )oderate
Objective: LO 3-2
,1
11) ?illiam ;regory, $.A, is the #rinci#al auditor for a multi-national cor#oration Another $.A
has e9amined and re#orted on the financial statements of a significant subsidiary of the
cor#oration ;regory is satisfied with the inde#endence and #rofessional re#utation of the other
auditor, as well as the 'uality of the other auditor&s e9amination ?ith res#ect to his re#ort on the
consolidated financial statements, ta"en as a whole, ;regory:
A) must not refer to the e9amination of the other auditor
!) must refer to the e9amination of the other auditor
$) may refer to the e9amination of the other auditor
%) must refer to the e9amination of the other auditors along with the #ercentage off consolidated
assets and revenue that they audited
Answer: $
(erms: +e#orts involving other auditors
%iff: )oderate
Objective: LO 3-2
11) A com#any has changed its method of inventory valuation from an unacce#table one to one
in conformity with generally acce#ted accounting #rinci#les (he auditor&s re#ort on the financial
statements of the year of the change should include:
A) no reference to consistency
!) a reference to a #rior #eriod adjustment in the o#inion #aragra#h
$) an e9#lanatory #aragra#h that justifies the change and e9#lains the im#act of the change on
re#orted net income
%) an e9#lanatory #aragra#h e9#laining the change
Answer: %
(erms: $onsistency modifications
%iff: )oderate
Objective: LO 3-2
1,) ?hich of the following modifications of the auditor&s re#ort does not include an e9#lanatory
#aragra#h<
A) A 'ualified re#ort is due to a ;AA. de#arture
!) (he re#ort includes an em#hasis of a matter
$) (here is a very material sco#e limitation
%) A #rinci#al auditor acce#ts the wor" of an other auditor
Answer: %
(erms: *hared o#inions
%iff: )oderate
Objective: LO 3-2
,1
13) 5o reference is made in the auditor&s re#ort to other auditors who #erform a #ortion of the
audit when:
3 (he other auditor audited an immaterial #ortion of the audit
33 (he other auditor is well "nown or closely su#ervised by the #rinci#le auditor
333 (he #rinci#le auditor has thoroughly reviewed the wor" of the other auditor
A) 3 and 33
!) 3 and 333
$) 33 and 333
%) 3, 33 and 333
Answer: %
%iff: )oderate
Objective: LO 3-2
12) ?hen an auditor is trying to determine how changes can affect consistency and and7or
com#arability, he should "ee# in mind that:
A) changes that affect com#arability but not consistency re'uire an e9#lanatory #aragra#h
!) items that materially affect the com#arability of financial statements re'uires a disclaimer of
o#inion
$) changes that affect consistency re'uire an e9#lanatory #aragra#h if they are material
%) changes that involve either com#arability or consistency only need to be mentioned in the
footnotes
Answer: $
(erms: *tandard audit re#ort= e9#lanatory #aragra#h= consistency and com#arability
%iff: )oderate
Objective: LO 3-2
18) All of the following would re'uire an em#hasis of matter #aragra#h except for:
A) the e9istence of material related #arty transactions
!) the lac" of auditor inde#endence
$) im#ortant events occurring subse'uent to the balance sheet date
%) material uncertainties disclosed in the footnotes
Answer: !
(erms: Dn'ualified o#inion with em#hasis on s#ecific matters regarding the financial statements
%iff: /asy
Objective: LO 3-2
,,
1:) Dnder A3$.A auditing standards, the #rimary auditor issuing the o#inion on the financial
statements is called the:
A) com#onent auditor
!) #rinci#al auditor
$) grou# engagement #artner
%) majority auditor
Answer: $
(erms: +e#orts involving other auditors
%iff: /asy
Objective: LO 3-2
1>) ?hich of the following is false concerning the #rinci#al $.A firm&s alternatives when issuing
a re#ort when another $.A firm #erforms #art of the audit<
A) 3ssue a joint re#ort signed by both $.A firms
!) )a"e no reference to the other $.A firm in the audit re#ort, and issue the standard
un'ualified o#inion
$) )a"e reference to the other auditor in the re#ort by using modified wording Fa shared o#inion
or re#ort)
%) A 'ualified o#inion or disclaimer, de#ending on materiality, is re'uired if the #rinci#al auditor
is not willing to assume any res#onsibility for the wor" of the other auditor
Answer: A
%iff: $hallenging
Objective: LO 3-2
1@) ?hich of the following re'uires recognition in the auditor&s o#inion as to consistency<
A) (he correction of an error in the #rior year&s financial statements resulting from a
mathematical mista"e in ca#itali4ing interest
!) A change in the estimate of #rovisions for warranty costs
$) (he change from the cost method to the e'uity method of accounting for investments in
common stoc"
%) A change in de#reciation method which has no effect on current year&s financial statements
but is certain to affect future years
Answer: $
(erms: $onsistency
%iff: $hallenging
Objective: LO 3-2
,3
1A) 3ndicate which changes would re'uire an e9#lanatory #aragra#h in the audit re#ort
A)
$orrection of an error by changing from
an accounting #rinci#le that is not
generally acce#table to one that is
generally acce#table $hange from L3BO to B3BO
6es 6es
!)
5o 5o
$)
6es 5o
%)
5o 6es
Answer: A
(erms: $hanges that re'uire e9#lanatory #aragra#h in audit re#ort
%iff: )oderate
Objective: LO 3-2
,2
,1) 3ndicate which changes would re'uire an e9#lanatory #aragra#h in the audit re#ort
A)
$hange in the estimated life
of an asset
Iariation in the format of the
6es 6es
!)
of an asset
5o 5o
$)
of an asset
6es 5o
%)
of an asset
5o 6es
Answer: !
(erms: $hanges that re'uire e9#lanatory #aragra#h in audit re#ort
%iff: )oderate
Objective: LO 3-2
,8
,1) 3ndicate which changes would re'uire an e9#lanatory #aragra#h in the audit re#ort
A)
(he $.A concludes there is
substantial doubt about the
entity&s ability to continue as
a going concern $hange from B3BO to L3BO
6es 6es
!)
5o 5o
$)
6es 5o
%)
5o 6es
Answer: A
(erms: $hanges that would re'uire an e9#lanatory #aragra#h in audit re#ort
%iff: )oderate
Objective: LO 3-2
,:
,,) 3ndicate which changes would re'uire an e9#lanatory #aragra#h in the audit re#ort
A)
A de#arture from ;AA.
which, due to unusual
circumstances, does not
re'uire a 'ualified or adverse
o#inion
(he $.A ma"es reference to
the wor" of another auditor to
indicate shared res#onsibility
in an un'ualified o#inion
6es 6es
!)
o#inion
5o 5o
$)
o#inion
6es 5o
%)
o#inion
5o 6es
Answer: $
(erms: $hanges that would re'uire an e9#lanatory #aragra#h in audit re#ort
%iff: $hallenging
Objective: LO 3-2
,>
,3) %iscuss each of the five circumstances when an auditor would issue an un'ualified audit
re#ort with an e9#lanatory #aragra#h or modified wording
Answer: An un'ualified re#ort with an e9#lanatory #aragra#h or modified wording is
a##ro#riate in the following circumstances:
E %ac& of consistent application of 'AA# ?hen the client has not followed generally acce#ted
accounting #rinci#les consistently in the current #eriod in relation to the #receding #eriod, an
un'ualified o#inion with an e9#lanatory #aragra#h following the o#inion #aragra#h is
a##ro#riate
E Substantial doubt about continuing as a going concern ?hen an auditor concludes there is
substantial doubt about the client&s ability to continue as a going concern, an un'ualified o#inion
with an e9#lanatory #aragra#h following the o#inion #aragra#h is a##ro#riate (he auditor also
has the o#tion of issuing a disclaimer of o#inion
E A departure from 'AA# (ith (hich the auditor concurs 3f adherence to ;AA. would result
in misleading financial statements, an un'ualified o#inion with an e9#lanatory #aragra#h is
a##ro#riate
E )mphasis of a matter 3f the auditor wants to em#hasi4e s#ecific matters in the audit re#ort,
an e9#lanatory #aragra#h discussing those matters may be added to an un'ualified re#ort
E Reports in*ol*ing other auditors ?hen an auditor relies u#on a different $.A firm to
#erform #art of the audit, the auditor can indicate that res#onsibility for the audit is shared with
another $.A firm by modifying the wording of an un'ualified re#ort
(erms: $ircumstances where an auditor will issue modified un'ualified re#ort with e9#lanatory
#aragra#h or modified wording
%iff: )oderate
Objective: LO 3-2
,2) A modified un'ualified audit re#ort arises when the auditor believes the financials are fairly
stated but also believes additional information should be #rovided
A) (rue
!) Balse
Answer: A
(erms: )odified un'ualified audit re#ort
%iff: /asy
Objective: LO 3-2
,8) $hanges in accounting estimates re'uires the auditor to issue a modified un'ualified audit
re#ort with a consistency #aragra#h inserted after the o#inion #aragra#h
A) (rue
!) Balse
Answer: !
(erms: $hanges of accounting estimates= )odified un'ualified audit re#ort
%iff: )oderate
Objective: LO 3-2
,@
,:) (he only modified un'ualified o#inion that does not include an e9#lanatory #aragra#h is
when other auditors are involved 3n this case only the introductory #aragra#h is modified
A) (rue
!) Balse
Answer: !
(erms: )odified un'ualified o#inion
%iff: )oderate
Objective: LO 3-2
,>) 3tems that materially affect the com#arability of the financial statements generally re'uire
disclosure in the footnotes
A) (rue
!) Balse
Answer: A
(erms: 3tems that materially affect com#arability of financial statements
%iff: )oderate
Objective: LO 3-2
,@) $hanges in an estimate, such as a change in the estimated useful life of an asset for
de#reciation #ur#oses, affect consistency but not com#arability, and therefore re'uire an
e9#lanatory #aragra#h in the audit re#ort
A) (rue
!) Balse
Answer: !
(erms: $om#arability vs consistency
%iff: )oderate
Objective: LO 3-2
,A) $hanges in re#orting entities, such as the inclusion of an additional com#any in combined
financial statements, affect com#arability but not consistency, and therefore do not re'uire an
e9#lanatory #aragra#h in the audit re#ort
A) (rue
!) Balse
Answer: !
(erms: $om#arability and consistency
%iff: $hallenging
Objective: LO 3-2
,A
31) ?hen an auditor relies u#on a different $.A firm to #erform #art of the audit and chooses to
issue a shared o#inion, only the auditor&s res#onsibility #aragra#h should be modified
A) (rue
!) Balse
Answer: !
(erms: Auditor reliance on different $.A firm to #erform #art of audit= *hared o#inion
%iff: )oderate
Objective: LO 3-2
31) ?hen other auditors are involved in the audit and they 'ualify their #ortion of the audit, the
#rinci#al auditor must decide if the amount in 'uestion is material to the financial statements as a
whole
A) (rue
!) Balse
Answer: A
(erms: *hared res#onsibility
%iff: $hallenging
Objective: LO 3-2
1) As a result of management&s refusal to #ermit the auditor to #hysically e9amine inventory, the
auditor must de#art from the un'ualified audit re#ort because:
A) the financial statements have not been #re#ared in accordance with ;AA.
!) the sco#e of the audit has been restricted by circumstances beyond either the client&s or
auditor&s control
$) the financial statements have not been audited in accordance with ;AA*
%) the sco#e of the audit has been restricted
Answer: %
(erms: Auditor must de#art from un'ualified audit re#ort= )anagement refusal to #ermit the
auditor to #hysically e9amine inventory
%iff: /asy
Objective: LO 3-8
31
,) An adverse o#inion is issued when the auditor believes:
A) some #arts of the financial statements are materially misstated or misleading
!) the financial statements would be found to be materially misstated if an investigation were
#erformed
$) the auditor is not inde#endent
%) the overall financial statements are so materially misstated that they do not #resent fairly the
financial #osition or results of o#erations and cash flows in conformity with ;AA.
Answer: %
(erms: Adverse o#inion
%iff: /asy
Objective: LO 3-8
3) An auditor can e9#ress a 'ualified o#inion due to a:
A)
%e#arture from
;AA. Lac" of $onsistency
Lac" of *ufficient
/vidence
6es 5o 5o
!)
%e#arture from
Lac" of *ufficient
/vidence
5o 6es 5o
$)
%e#arture from
Lac" of *ufficient
/vidence
6es 5o 6es
%)
%e#arture from
Lac" of *ufficient
/vidence
6es 6es 6es
Answer: $
(erms: Jualified o#inions
%iff: /asy
Objective: LO 3-8
31
2) An auditor determines the financial statements include at least a material de#arture from
;AA. ?hich ty#e of o#inion may be issued<
A)
%isclaimer Jualified Adverse
6es 5o 5o
!)
5o 6es 5o
$)
6es 5o 6es
%)
5o 6es 6es
Answer: %
(erms: O#inion , ;AA. de#arture
%iff: )oderate
Objective: LO 3-8
8) A 'ualified o#inion can be issued for which of the following<
3 ?hen a limitation on the sco#e of the audit has occurred
33 ?hen the auditor lac"s inde#endence
333 ?hen generally acce#ted accounting #rinci#les have not been used
A) 3 and 33
!) 3 and 333
$) 33 and 333
%) 3, 33 and 333
Answer: !
(erms: Jualified o#inion
%iff: )oderate
Objective: LO 3-8
3,
:) 3n which situation would the auditor be choosing between -e9ce#t for- 'ualified o#inion and
an adverse o#inion<
A) (he auditor lac"s inde#endence
!) A client-im#osed sco#e limitation
$) A circumstance im#osed sco#e limitation
%) Lac" of full disclosure within the footnotes
Answer: %
(erms: Jualified o#inion and adverse o#inion
%iff: )oderate
Objective: LO 3-8
>) ?hen the auditor determines that the financial statements are fairly stated, but there is a
noninde#endent relationshi# between the auditor and the client, the auditor should issue:
A) an adverse o#inion
!) a disclaimer of o#inion
$) either a 'ualified o#inion or an adverse o#inion
%) either a 'ualified o#inion or an un'ualified o#inion with modified wording
Answer: !
(erms: Audit re#ort when auditor not inde#endent
%iff: )oderate
Objective: LO 3-8
@) 3f the auditor lac"s inde#endence, a disclaimer of o#inion must be issued:
A) if the client re'uests it
!) only if it is highly material
$) only if it is material but not #ervasive
%) in all cases
Answer: %
(erms: %isclaimer when auditor lac"s inde#endence
%iff: )oderate
Objective: LO 3-8
A) 3f the #hrase -e9ce#t for- is #resent in the o#inion #aragra#h of the audit re#ort, the auditor
has issued aFn):
A) adverse o#inion
!) disclaimer of o#inion
$) un'ualified o#inion
%) 'ualified o#inion
Answer: %
(erms: %e#arture from un'ualified audit re#ort
%iff: )oderate
Objective: LO 3-8
33
11) A client has changed their method of valuing inventory from B3BO to L3BO and the change
has a material effect on the financial statements 3f the auditor does not concur with the
a##ro#riateness of the change, the auditor should issue aFn):
A) disclaimer
!) adverse o#inion
$) un'ualified o#inion
%) 'ualified o#inion
Answer: %
(erms: $hange in valuing inventory and auditor does not concur with change
%iff: )oderate
Objective: LO 3-8
11) 3tems that materially affect the com#arability of financial statements generally re'uire
disclosure in the footnotes 3f the client refuses to #ro#erly disclose the item, the auditor will
most li"ely issue:
A) a disclaimer
!) an un'ualified o#inion
$) a 'ualified o#inion
%) an adverse o#inion
Answer: $
(erms: %isclosure and com#arability
%iff: )oderate
Objective: LO 3-8
1,) ?hich of the following scenarios does not result in a 'ualified o#inion<
A) A sco#e limitation #revents the auditor from com#leting an im#ortant audit #rocedure
!) $ircumstances e9ist that #revent the auditor from conducting a com#lete audit
$) (he auditor lac"s inde#endence with res#ect to the audited entity
%) An accounting #rinci#le at variance with ;AA. is used
Answer: $
(erms: Jualified o#inion
%iff: )oderate
Objective: LO 3-8
32
13) ?henever the client im#oses restrictions on the sco#e of the audit, the auditor should be
concerned that management may be trying to #revent discovery of misstatements 3n such cases,
the auditor will li"ely issue a:
A) disclaimer of o#inion in all cases
!) 'ualification of both sco#e and o#inion in all cases
$) disclaimer of o#inion whenever materiality is in 'uestion
%) 'ualification of both sco#e and o#inion whenever materiality is in 'uestion
Answer: $
(erms: $lient im#osed restrictions on sco#e of audit
%iff: )oderate
Objective: LO 3-8
12) 3n which of the following circumstances would an auditor most li"ely e9#ress an adverse
o#inion<
A) (he $/O refuses to let the auditor have access to the board of director meeting minutes
!) (he financial statements are not in conformity with the BA*! statement on loss
contingencies
$) 3nformation comes to the auditor&s attention that raises substantial doubt about the ability for
the client to continue as a going concern
%) (ests of controls show that the internal control structure is so #oor that the auditor has to
assess control ris" at the ma9imum
Answer: !
(erms: Adverse o#inion circumstances
%iff: )oderate
Objective: LO 3-8
18) ?hich of the following statements is true<
3 (he auditor is re'uired to issue a disclaimer of o#inion in the event of a material uncertainty
33 (he auditor is re'uired to issue a disclaimer of o#inion in the event of a going concern
#roblem
A) 3 only
!) 33 only
$) 3 and 33
%) 5either 3 nor 33
Answer: %
(erms: %isclaimer of o#inion
%iff: $hallenging
Objective: LO 3-8
38
1:) (he most common case in which conditions beyond the client&s and auditor&s control cause a
sco#e restriction in an engagement is when the:
A) auditor is not a##ointed until after the client&s year-end
!) client won&t allow the auditor to confirm receivables for fear of offending its customers
$) auditor doesn&t have enough staff to satisfactorily audit all of the client&s foreign subsidiaries
%) client is going through $ha#ter 11 ban"ru#tcy
Answer: A
(erms: *co#e restriction beyond client and auditor control
%iff: $hallenging
Objective: LO 3-8
1>) ?hen the client fails to ma"e ade'uate disclosure in the body of the statements or in the
related footnotes, it is the res#onsibility of the auditor to:
A) inform the reader that disclosure is not ade'uate, and to issue an adverse o#inion
!) inform the reader that disclosure is not ade'uate, and to issue a 'ualified o#inion
$) #resent the information in the audit re#ort and issue an un'ualified or 'ualified o#inion
%) #resent the information in the audit re#ort and to issue a 'ualified or an adverse o#inion
Answer: %
(erms: 3nade'uate disclosure
%iff: $hallenging
Objective: LO 3-8
1@) (here are three conditions necessitating a de#arture from an un'ualified audit re#ort 5ame,
discuss and state the a##ro#riate audit re#ort for each of these three conditions
Answer: (he three conditions re'uiring a de#arture from an un'ualified re#ort are:
E *co#e +estrictions A sco#e restriction can be im#osed by the client or due to circumstances
beyond the auditor&s or client&s control 3n either case the sco#e restriction #revents the auditor
from accumulating sufficient evidence to reach a conclusion regarding whether financial
statements are stated in accordance with ;AA. (he ty#e of o#inion, de#ending u#on
materiality, would be either a 'ualified or a disclaimer of o#inion re#ort
E ;AA. %e#artures 3n this situation the financial statements are not #re#ared in accordance
with ;AA. Accordingly, the auditor would issue a 'ualified o#inion if the ;AA. violation were
moderately material, or an adverse o#inion if the ;AA. violation were highly material
E Auditor lac"s inde#endence 3nde#endence is ordinarily determined by +ule 111 of the rules
of the $ode of .rofessional $onduct ?hen the auditor is not inde#endent, the only re#ort the
auditor can issue is a disclaimer of o#inion
(erms: $onditions necessitating a de#arture from an un'ualified audit re#ort
%iff: )oderate
Objective: LO 3-8
3:
1A) A 'ualified audit re#ort is issued when all auditing conditions have been met, no significant
misstatements have been discovered, and it is the auditor&s o#inion that the financial statements
are fairly stated in accordance with ;AA.
A) (rue
!) Balse
Answer: !
(erms: Jualified re#ort
%iff: /asy
Objective: LO 3-8
,1) Auditors should issue a disclaimer of o#inion when there is a highly material client-im#osed
sco#e restriction
A) (rue
!) Balse
Answer: A
(erms: %isclaimer of o#inion= $lient-im#osed sco#e restriction
%iff: )oderate
Objective: LO 3-8
,1) ?henever an auditor issues a 'ualified re#ort, he or she must use the term -e9ce#t for - in
the o#inion #aragra#h
A) (rue
!) Balse
Answer: A
(erms: Jualified re#ort= /9ce#t for in o#inion #aragra#h
%iff: )oderate
Objective: LO 3-8
,,) A 'ualified re#ort can ta"e the form of a 'ualification of both the sco#e and the o#inion or of
the o#inion alone
A) (rue
!) Balse
Answer: A
(erms: Jualified re#ort= *co#e limitation
%iff: )oderate
Objective: LO 3-8
3>
,3) ?hen an auditor discovers a highly material ;AA. violation in the financial statements and
the client refuses to correct it, the auditor should issue a disclaimer of o#inion
A) (rue
!) Balse
Answer: !
(erms: %isclaimer of o#inion= Gighly material ;AA. violation in the financial statements and
client refuses to correct it
%iff: )oderate
Objective: LO 3-8
,2) $lient im#osed restrictions on the audit always re'uire a disclaimer of o#inion
A) (rue
!) Balse
Answer: !
(erms: %isclaimer of o#inion= $lient im#osed restrictions on audit
%iff: )oderate
Objective: LO 3-8
,8) An auditor should issue a 'ualified o#inion with an e9#lanatory #aragra#h whenever there is
a material uncertainty affecting the financial statements
A) (rue
!) Balse
Answer: !
(erms: Jualified o#inion with e9#lanatory #aragra#h
%iff: )oderate
Objective: LO 3-8
Learning Objective 3-:
1) A misstatement in the financial statements can be considered material if "nowledge of the
misstatement will affect a decision of:
A) the .$AO!
!) a reasonable user of the financial statements
$) an accountant
%) the */$
Answer: !
(erms: )ateriality
%iff: )oderate
Objective: LO 3-:
3@
,) )isstatements must be com#ared with some measurement base before a decision can be made
about materiality A commonly acce#ted measurement base includes:
A) net income
!) total assets
$) wor"ing ca#ital
%) all of the above
Answer: %
(erms: )isstatements and materiality
%iff: )oderate
Objective: LO 3-:
3) ?hen com#aring misstatements with a measurement base, the auditor must consider the
#ervasiveness of the misstatement Of the following e9am#les, the most #ervasive misstatement
is aFn):
A) understatement of inventory
!) understatement of retained earnings caused by a miscalculation of dividends #ayable
$) misclassification of notes #ayable as a long-term liability when it should be current
%) misclassification of salary e9#ense as a selling e9#ense
Answer: A
(erms: .ervasive misstatements
%iff: )oderate
Objective: LO 3-:
2) (he dollar amount of some misstatements cannot be accurately measured Bor e9am#le, if the
client were unwilling to disclose an e9isting lawsuit, the auditor must estimate the li"ely effect
on:
A) net income
!) users of the financial statements
$) the auditor&s e9#osure to lawsuits
%) management&s future decisions
Answer: !
(erms: )isstatements accurately measured
%iff: )oderate
Objective: LO 3-:
3A
8) 3f most or all users& decisions that are based on the financial statements are li"ely to be
significantly affected, the materiality level is:
A) unrestricted
!) material
$) #ervasive
%) ris"y
Answer: $
(erms: )ateriality 'ualifications
%iff: )oderate
Objective: LO 3-:
:) ?hen a client fails to follow ;AA., the audit re#ort can be un'ualified, 'ualified, or adverse
de#ending on the materiality ?hat factors affect materiality that an auditor should consider<
A) (he dollar amount in com#arison to a base
!) 3f the misstatement can be measured
$) (he nature of the item
%) All the above are factors an auditor should consider regarding materiality
Answer: %
(erms: $lient fails to follow ;AA.= )ateriality
%iff: )oderate
Objective: LO 3-:
>) ?hich of the following is a correct statement regarding materiality<
A) (here are well-defined guidelines that enable auditors to determine if something is material
!) )isstatements must be com#ared with some benchmar" before a decision can be made about
the materiality level of the failure of a com#any to follow ;AA.
$) .ervasiveness is not considered when com#aring #otential misstatements with a base or
benchmar"
%) (o evaluate overall materiality, the auditor does not combine all unadjusted misstatements
Answer: !
(erms: )ateriality
%iff: )oderate
Objective: LO 3-:
21
@) %iscuss how materiality affects audit re#orting decisions
Answer: ?hen determining the a##ro#riate audit re#ort to issue, the auditor considers three
levels of materiality for a given condition (hese three levels are F1) immaterial, F,) material
without overshadowing the financial statements as a whole, and F3) so material and so #ervasive
that overall fairness of the statements is in 'uestion Bor conditions involving a ;AA. violation,
the materiality level of the violation influences whether an un'ualified, 'ualified, or adverse
o#inion is issued Bor conditions involving a sco#e restriction, the materiality of the restriction
influences whether an un'ualified re#ort, a 'ualified sco#e and o#inion re#ort, or a disclaimer of
o#inion is issued
(erms: )ateriality affect on audit re#orting decisions
%iff: /asy
Objective: LO 3-:
A) )ateriality is essential when an auditor considers his7her determination of the a##ro#riate
re#ort for a given set of circumstances
A) (rue
!) Balse
Answer: A
(erms: )ateriality= A##ro#riate re#ort
%iff: /asy
Objective: LO 3-:
11) A #ervasive e9ce#tion is one that affects different #arts of the financial statements
A) (rue
!) Balse
Answer: A
(erms: .ervasive e9ce#tion
%iff: /asy
Objective: LO 3-:
11) An item with a -#sychic- effect Feg, where the item maintains an increasing earnings trend)
is a 'ualitative factor that may affect the auditors decision regarding materiality
A) (rue
!) Balse
Answer: A
(erms: .sychic effect= )ateriality
%iff: $hallenging
Objective: LO 3-:
21
Learning Objective 3->
1) (he e9#lanatory #aragra#h for a 'ualified o#inion would:
A) #recede the sco#e #aragra#h
!) follow the sco#e #aragra#h
$) follow the o#inion #aragra#h
%) either #recede or follow the o#inion #aragra#h de#ending on the materiality
Answer: !
(erms: /9#lanatory #aragra#h for 'ualified o#inion
%iff: /asy
Objective: LO 3->
,) An auditor who issues a 'ualified o#inion because sufficient a##ro#riate evidence was not
obtained should describe the limitations in an e9#lanatory #aragra#h (he auditor should also
modify the:
A)
*co#e #aragra#h O#inion #aragra#h
5otes to the financial
statements
6es 5o 6es
!)
statements
5o 6es 6es
$)
statements
5o 6es 5o
%)
statements
6es 6es 5o
Answer: %
(erms: Jualified o#inion insufficient evidence
%iff: $hallenging
Objective: LO 3->
2,
3) ?hen an auditor issues a 'ualified re#ort due to a sco#e limitation an e9#lanatory #aragra#h is
normally added ?hich, if any, of the following #aragra#hs are also modified<
A)
3ntroductory *co#e O#inion
6es 6es 6es
!)
6es 6es 5o
$)
5o 6es 5o
%)
5o 6es 6es
Answer: %
(erms: Jualified re#ort due to sco#e restriction= .aragra#hs modified
%iff: )oderate
Objective: LO 3->
2) ?hen a 'ualified or adverse o#inion is issued, the 'ualifying #aragra#h is inserted:
A) between the introductory and sco#e #aragra#hs
!) between the sco#e and o#inion #aragra#hs
$) after the o#inion #aragra#h, as a fourth #aragra#h
%) immediately after the address, as the first #aragra#h
Answer: !
(erms: Jualified or adverse o#inion #aragra#h #lacement
%iff: )oderate
Objective: LO 3->
23
8) (he inde#endent auditor must issue a 'ualified o#inion when which of the financialFs) are
missing<
3 !alance *heet
33 3ncome *tatement
333 *tatement of $ash Blows
A) 3 only
!) 33 only
$) 333 only
%) 3, 33, and 333
Answer: $
(erms: Jualified o#inion issued when which financial statement is missing
%iff: )oderate
Objective: LO 3->
:) 3f the financial statements include an income statement and a balance sheet but e9clude the
statement of cash flows, the auditors:
A) can issue an un'ualified re#ort
!) should issue a 'ualified o#inion due to the de#arture from ;AA.
$) should issue a 'ualified o#inion because the missing statement of cash flows constitutes a
sco#e limitation
%) should include the statement of cash flows, modify the re#ort and issue an un'ualified
o#inion
Answer: !
(erms: +e#ort when financial statements e9clude statement of cash flows
%iff: $hallenging
Objective: LO 3->
>) ?hich of the following is incorrect concerning sco#e limitations<
A) 3f client im#osed, the auditor should be concerned about the client trying to #revent discovery
of a material misstatement
!) An un'ualified o#inion can result if auditors can #erform alternative #rocedures and are
satisfied that the information is fairly stated
$) (he most common circumstance im#osed sco#e restriction is due to the client changing their
auditors
%) (he most common circumstance im#osed sco#e limitation is when the auditor is a##ointed
after the balance sheet date
Answer: $
(erms: *co#e limitation
%iff: )oderate
Objective: LO 3->
22
@) ?hen dealing with materiality and sco#e limitation conditions:
A) a disclaimer of o#inion must be issued
!) it is easier to evaluate the materiality of #otential misstatements resulting from a sco#e
limitation than for failure to follow ;AA.
$) sco#e limitations im#osed by the client are always considered material
%) a un'ualified o#inion may still be issued de#ending on the materiality of the sco#e limitation
Answer: %
(erms: *co#e limitation
%iff: )oderate
Objective: LO 3->
A) ?hen a #ervasive sco#e limitation e9ists:
A) a disclaimer of o#inion rather than a 'ualified o#inion is generally re'uired
!) the auditor&s res#onsibility #aragra#h is modified to indicate that the auditor was not able to
obtain sufficient a##ro#riate evidence to e9#ress an audit o#inion
$) sections of the auditor&s res#onsibility #aragra#h are eliminated to avoid stating anything that
might lead readers to believe that other #arts of the financial statements might be fairly stated
%) all of the above
Answer: %
(erms: .ervasive sco#e limitation
%iff: )oderate
Objective: LO 3->
11) ?hen there is a sco#e restriction, what ty#e of audit re#ort can be issued<
A) Dn'ualified o#inion
!) Jualification of sco#e and o#inion
$) %isclaimer of o#inion
%) Any of the above
Answer: %
(erms: Audit re#orts in various situations
%iff: )oderate
Objective: LO 3->
28
11) *ubse'uent to the close of *#acely *#roc"ets fiscal year ending October 31, ,11,, a major
debtor has declared ban"ru#tcy due to a series of events (he receivable is significantly material
in relation to the financial statements, and recovery is doubtful (he debtor had confirmed the
full amount due to *#acely *#roc"et at the balance sheet date !ecause the account was
confirmed at the balance sheet date, *#acely refuses to disclose any information in relation to
this subse'uent event (he $.A believes that all other accounts were stated fairly at the balance
sheet date 3n addition, *#acely changed their method of inventory valuation from B3BO to L3BO
(his change was disclosed in 5ote K to the financial statements Accordingly, what ty#e of
o#inion should be e9#ressed<
A) Dn'ualified with an e9#lanatory #aragra#h
!) Jualified due to a ;AA. de#arture
$) Jualified due to a sco#e limitation
%) A combination of ! and $
Answer: !
(erms: Audit re#ort when client has subse'uent event and change in inventory valuation
%iff: $hallenging
Objective: LO 3->
1,) Bor the re#ort containing a disclaimer for lac" of inde#endence, the disclaimer is in the:
A) second or sco#e #aragra#h
!) third or o#inion #aragra#h
$) first and only #aragra#h
%) fourth or e9#lanatory #aragra#h
Answer: $
(erms: %isclaimer in which re#ort #aragra#h
%iff: $hallenging
Objective: LO 3->
13) ?hen an adverse o#inion is issued, a sco#e #aragra#h would be:
A) 'ualified
!) unchanged
$) deleted
%) e9#anded to identify the additional #rocedures which the auditor #erformed
Answer: !
(erms: Adverse o#inion and sco#e #aragra#h
%iff: $hallenging
Objective: LO 3->
2:
12) After the balance sheet date but #rior to issuance of the auditor&s re#ort the auditor learns that
the client&s facility in a foreign country has been e9#ro#riated )anagement refuses to disclose
this information in a financial statement footnote or #resent #ro-forma data as to the effect of the
event (he auditor should:
A) add a footnote to the financial statements
!) disclaim an o#inion due to the client im#osed sco#e limitation
$) #rovide the information in the re#ort and modify the o#inion
%) issue an un'ualified o#inion but #rovide the information in the auditor re#ort
Answer: $
(erms: )aterial subse'uent event management refusal to disclose
%iff: $hallenging
Objective: LO 3-1 and LO 3->
2>
18) (he following is a #ortion of an adverse audit re#ort issued for a #ublic com#any F5ote: A
se#arate re#ort was issued on the effectiveness of internal control over financial re#orting)

Independent Auditor's Report
(o the shareholders of ?allace $or#oration
?e have audited the accom#anying balance sheet of ?allace $or#oration as of %ecember 31,
,11,, and the related statements of income, retained earnings, and cash flows for the year then
ended (hese financial statements are the res#onsibility of the com#any&s management Our
res#onsibility is to e9#ress an o#inion on these financial statements based on our audit
?e conducted our audit in accordance with the standards of the .ublic $om#any Accounting
Oversight !oard FDnited *tates) (hose standards re'uire that we #lan and #erform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement An audit includes e9amining, on a test basis, evidence su##orting the amounts and
disclosures in the financial statements An audit also includes assessing the accounting #rinci#les
used and significant estimates made by management, as well as evaluating the overall financial
statement #resentation ?e believe that our audit #rovides a reasonable basis for our o#inion
(he com#any has e9cluded from #ro#erty and debt in the accom#anying balance sheet certain
lease obligations that, in our o#inion, should be ca#itali4ed in order to conform with generally
acce#ted accounting #rinci#les 3f these lease obligations were ca#itali4ed, #ro#erty would be
increased by L12,811,111, long-term debt by L13,,11,111, and retained earnings by L1,311,111
as of %ecember 31, ,11,, and net income and earnings #er share would be increased by
L1,311,111 and L,,8, res#ectively, for the year then ended

Re$uired:
$om#lete the above adverse audit re#ort by #re#aring the o#inion #aragra#h %o not date or sign
the re#ort
Answer: 3n our o#inion, because of the significance of the matter discussed in the #receding
#aragra#h, the financial statements referred to above do not #resent fairly the financial #osition
of ?allace $or#oration as of %ecember 31, ,11,, or the results of its o#erations and its cash
flows for the year then ended
(erms: Adverse audit re#ort
%iff: $hallenging
Objective: LO 3->
(o#ic: .ublic
2@
1:) (he following is the introductory #aragra#h, and the !asis for Jualified O#inion #aragra#h
for Bast (imes $or#oration, a non-#ublic com#any
(o the shareholders of Bast (imes $or#oration
?e have audited the accom#anying balance sheet of Bast (imes $or#oration as of *e#tember 31,
,11,, and the related statements of income, retained earnings, and cash flows for the year then
ended, and the related notes to the financial statements
+asis for ,ualified Opinion
?e were unable to obtain audited financial statements su##orting the com#any&s investment in a
foreign affiliate stated at L1,121,111, or its e'uity in earnings of that affiliate of L811,111, which
is included in net income, as described in 5ote 12 to the financial statements !ecause of the
nature of the com#any&s records, we were unable to satisfy ourselves as to the carrying value of
the investment or the e'uity in its earnings by means of other auditing #rocedures
Re$uired:
.re#are the o#inion #aragra#h for the above audit re#ort %o not date or sign the re#ort
Answer: 3n our o#inion, e9ce#t for the effects of the matter described in the !asis for Jualified
O#inion #aragra#h, the financial statements referred to above #resent fairly, in all material
res#ects, the financial #osition of Bast (imes $or#oration as of *e#tember 31, ,11,, and the
results of its o#erations and its cash flows for the year then ended in conformity with accounting
#rinci#les generally acce#ted in the Dnited *tates of America
(erms: Jualified sco#e and o#inion re#ort
%iff: $hallenging
Objective: LO 3->
(o#ic: .ublic
1>) 6our $.A firm has com#leted the fieldwor" for the ,11, audit of *har# $or#oration, a
#rivate com#any with an October year-end 6ou were #re#aring to draft a standard, un'ualified
audit re#ort when you discovered that the audit manager on the *har# engagement owns 11
shares of *har#&s common stoc" .re#are the a##ro#riate re#ort
Answer: ?e are not inde#endent with res#ect to *har# $or#oration, and the accom#anying
balance sheet as of October 31, ,11,, and the related statements of income, retained earnings,
and cash flows for the year then ended were not audited by us Accordingly, we do not e9#ress an
o#inion on them
Note: (here is no re#ort title when the auditor issues a disclaimer due to a lac" of inde#endence
(erms: Audit re#ort with lac" of inde#endence
%iff: )oderate
Objective: LO 3->
2A
1@) Assume you are the #artner in charge of the ,11, audit of !ec"er $or#oration, a #rivate
com#any (he audit re#ort has not yet been #re#ared 3n each inde#endent situation following F1-
@), indicate the a##ro#riate action Fa-g) to be ta"en (he #ossible actions are as follows:
a 3ssue a standard un'ualified re#ort
b Jualify both the sco#e and o#inion #aragra#hs
c Jualify the o#inion #aragra#h
d 3ssue an un'ualified o#inion with an e9#lanatory #aragra#h
e 3ssue an un'ualified o#inion with modified wording Fno e9#lanatory #aragra#h)
f 3ssue an adverse o#inion
g %isclaim an o#inion
(he situations are as follows:
MMMMMMMM 1 !ec"er $or#oration carries its #ro#erty, #lant, and e'ui#ment accounts at current
mar"et values $urrent mar"et values e9ceed historical cost by a highly material amount, and the
effects are #ervasive throughout the financial statements
MMMMMMMM , )anagement of !ec"er $or#oration refuses to allow you to observe, or ma"e, any
counts of inventory (he recorded boo" value of inventory is highly material
MMMMMMMM 3 6ou were unable to confirm accounts receivable with !ec"er&s customers Gowever,
because of detailed sales and cash recei#ts records, you were able to #erform reliable alternative
audit #rocedures
MMMMMMMM 2 One wee" before the end of fieldwor", you discover that the audit manager on the
!ec"er engagement owns a material amount of !ec"er&s common stoc"
MMMMMMMM 8 6ou relied u#on another $.A firm to #erform #art of the audit Although you were
the #rinci#al auditor, the other firm audited a material #ortion of the financial statements 6ou
wish to refer to Fbut not name) the other firm in your re#ort
MMMMMMMM : 6ou have substantial doubt about !ec"er&s ability to continue as a going concern
MMMMMMMM > !ec"er $or#oration changed its method of com#uting de#reciation in ,11, 6ou
concur with the change and the change is #ro#erly disclosed in the financial statement footnotes
MMMMMMMM @ (en days after the balance sheet date, one of !ec"er&s buildings was destroyed by a
fire !ec"er refuses to disclose this information in a footnote to the financial statements, but you
believe disclosure is re'uired to conform with ;AA. (he amount of the uninsured loss was
material, but not highly material
81
Answer:
1 f
, g
3 a
2 g
8 e
: d or g
> d
@ c
(erms: Audit re#orts in various situations
%iff: $hallenging
Objective: LO 3-1, LO ,-2, LO 3-8, and LO 3->
81
1A) *mith and Cones, $.As, audited the consolidated financial statements of $oncord 3nc and all
but one of its subsidiaries for the year ended *e#tember 31, ,11, and are e9#ressing an
un'ualified o#inion on the financials #resented as a whole
*mith, the engagement #artner, instructed )ary, an assistant on the engagement, to draft the
auditor&s re#ort on 5ovember 2, ,11,, the date of fieldwor" com#letion 3n drafting the re#ort
)ary considered the following:
E 3n #re#aring its financial statements, $oncord changed its method of accounting for research
and develo#ment costs and #ro#erly e9#ensed these amounts )anagement described the change
in #rinci#le in 5ote 11 to the consolidated financial statements
E !all N !rown, $.As, audited the financial statements of !iotherm, 3nc, a consolidated
subsidiary of $oncord for the year ended *e#tember 31, ,11, (he subsidiary&s financial
statements reflect total assets of ,,O and total revenues of ,1O of the consolidated totals !all N
!rown e9#ressed an un'ualified o#inion and furnished to *mith N Cones a co#y of their auditor
re#ort *mith N Cones have decided not to assume res#onsibility for the wor" of !all N !rown
insofar as it relates to the e9#ression of an o#inion on the consolidated financial statements ta"en
as a whole because of the materiality of !iotherm&s financial statements to the consolidated
whole !all N !rown&s re#ort will not be #resented together with that of *mith N Cones
E $oncord is the subject of a grand jury investigation into #ossible violations of federal
antitrust laws and #ossible related crimes +elated civil class actions are #ending $oncord&s
management has ade'uately disclosed in 5ote 1, to their consolidated financial statements
!ecause of the early stage of the investigation, the ultimate outcome of these matters cannot be
determined at this time (herefore, no #rovision for any liability that may result has been
recorded
E $oncord e9#erienced a net loss in ,11, and is currently in default under substantially all of
its debt agreements )anagement&s #lans in regard to these matters are ade'uately disclosed in
5ote 12 to $oncord&s consolidated financial statements (he financials do not include any
adjustments that might result from the outcome of this uncertainty (hese matters rase substantial
doubt about $oncord&s ability to continue as a going concern
!all reviewed )ary&s draft and indicated in his review notes that there were many deficiencies in
)ary&s %raft (he audit re#ort that )ary drafted follows
?e have audited the consolidated financial statements of $oncord, 3nc, and subsidiaries as of
*e#tember 31, ,11,, and the related consolidated statements of income, changes in stoc"holders
e'uity and cash flows for the year then ended (hese financial statements are the res#onsibility of
the $om#any&s management Our res#onsibility is to e9#ress an o#inion on these financial
statements based on our audits ?e did not audit the financial statements of !iotherm, 3nc, a
wholly-owned subsidiary, which statements reflect total assets and revenues constituting ,,O
and ,1O res#ectively at *e#tember 31, ,11, of the consolidated totals (hose statements were
audited by !all N !rown, $.As, whose re#orts have been furnished to us, and our o#inion,
insofar as it relates to the amounts included for !iotherm, 3nc is based solely on their re#ort
?e conducted our audit in accordance with generally acce#ted auditing standards (hose
8,
standards re'uire that we #lan and #erform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement An audit includes e9amining,
on a test basis, evidence su##orting the amounts and disclosures in the financial statements An
audit also includes assessing the accounting #rinci#les used, as well as assessing control ris" ?e
believe our audits #rovide a reasonable basis for our o#inion
3n our o#inion, based on our audit and the re#ort of the other auditors, the consolidated financial
statements referred to above #resent fairly, in all material res#ects, the financial #osition of
$oncord 3nc, as of *e#tember 31, ,11, in conformity with generally acce#ted accounting
#rinci#les, e9ce#t for the uncertainty, which is discussed in 5ote 1, to the consolidated
financials
(he accom#anying consolidated financial statements have been #re#ared assuming that the
$om#any will continue in e9istence for a reasonable #eriod of time As discussed in 5ote 12 to
the consolidated financial statements, the $om#any suffered a net loss and is currently in default
under substantially all of its debt agreements )anagement&s #lans in regard to these matters are
also described in 5ote 12 (he consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty
*mith N Cones, $.As
5ovember 2, ,11,
+e'uired:
(he following items #resent some of the deficiencies in the drafted audit re#ort noted by *mith
Bor each deficiency, indicate whether:
* *mith&s review note is correct
) )ary&s draft is correct
! !oth *mith&s review note and )ary&s draft are incorrect
Smith's Review Notes
1 An e9#lanatory #aragra#h is re'uired between the sco#e and o#inion #aragra#hs is re'uired
for the change in accounting #rinci#les referring the reader to 5ote 11
, (he names of the other auditors do not need to be e9#licitly stated in the introductory
#aragra#h Only that -other auditors- #erformed the audit and #rovided their re#ort
3 (he o#inion #aragra#h should e9tend the auditor&s o#inion beyond financial #osition to include
the results of $oncord&s o#erations and flows

2 (he reference to the uncertainty in the o#inion #aragra#h is incom#lete 3t should describe the
nature of the uncertainty as #ertaining to the grand jury investigation into #ossible violations of
federal antitrust laws

8 (he e9#lanatory #aragra#h following the o#inion #aragra#h does not include the terms
-substantial doubt- and -going concern- (hese terms are re'uired to be used in this #aragra#h
83
: (he e9#lanatory #aragra#h following the o#inion #aragra#h includes an ina##ro#riate
statement that -the consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty- (his statement is misleading and should be omitted
Answer:
1 !
, *
3 *
2 !
8 *
: )
(erms: %eficiencies in audit re#orts
%iff: $hallenging
Objective: LO 3-1, LO 3-2, and LO 3->
82
,1) 3n auditing the long-term investments account, Arens, $.A, is unable to obtain audited
financial statements for an investee located in a foreign country Levine concludes sufficient
a##ro#riate audit evidence regarding this investment cannot be obtained
Bor each of the following situations below, identify the a##ro#riate o#inion ty#e and re#ort
modification by selecting a choice from the a##ro#riate tables below

*ituation
O#inion
(y#e
3ntro *co#e O#inion /9#1
1 Assume the #otential effect on the
financial statements is immaterial
, Assume the #otential effect on the
financial statements is moderate
financial statements is high

O#inion (y#e *tandard .aragra#h $hoice /9#lanatory .aragra#h
D Dn'ualified O Omit 1 5one re'uired
J Jualified 5 5o change P 3nsert before o#inion
A Adverse ) )odify - 3nsert after o#inion
% %isclaimer
Answer:
*ituation
O#inion
(y#e
3ntro *co#e O#inion /9#1
financial statements is immaterial D 5 5 5 1
, Assume the #otential effect on the
financial statements is moderate J 5 ) ) P
financial statements is high % O ) ) P

(erms: $ircumstances and re'uired audit re#orts
%iff: $hallenging
Objective: LO 3-1, LO 3-2, and LO 3->
88
,1) Audit situations 1 through 11 #resent various inde#endent factual situations an auditor might
encounter in conducting an audit List A re#resents the ty#es of o#inions the auditor ordinarily
would issue, and List ! re#resents the re#ort modifications Fif any) that would be necessary Bor
each situation, select one res#onse from List A and one from List ! *elect, as the best answer
for each item, the action the auditor normally would ta"e 3tems from either list may be selected
once, more than once, or not at all
Assume the following:
E (he auditor is inde#endent
E (he auditor #reviously e9#ressed an un'ualified o#inion on the #rior-year financial
statements unless otherwise noted
E Only single-year Fnot com#arative) statements are #resented for the current year Funless
otherwise stated)
E (he conditions for an un'ualified o#inion e9ist unless contradicted in the factual scenario
E (he conditions stated in the factual scenario are material
E 5o re#ort modifications are to be made e9ce#t in res#onse to the factual scenario
Bactual *cenario
1 (he financial statements #resent fairly, in all material res#ects, the financial #osition, results of
o#erations, and cash flows in conformity with ;AA.
, 3n auditing the Long-(erm 3nvestments account, an auditor is unable to obtain audited B7* for
an investee located in a foreign country (he auditor concludes that sufficient com#etent
evidential matter regarding this investment cannot be obtained but it is not #ervasive to the
financials as a whole
3 %ue to recurring o#erating losses and wor"ing ca#ital deficiencies the auditor has substantial
doubt about an entity&s ability to continue as a going concern for a reasonable #eriod of time
Gowever, the B7* disclosures are ade'uate
2 (he #rinci#al auditor decides to refer to the wor" of another auditor, who audited a wholly
owned subsidiary of the entity and issued an un'ualified o#inion
8 An entity issues B7* that #resent financial #osition and results of o#erations but omits the
related statement of cash flows )anagement discloses in the notes to the B7* that it does not
believe the statement of cash flows to be useful
: An entity changes its de#reciation method for #roduction e'ui#ment from *L to units of
#roduction based on hours of utili4ation (he auditor concurs with the change, although it has a
material effect on the com#arability of the entity&s B7*
> An entity is a defendant in a lawsuit alleging infringement of certain #atent rights Gowever,
management cannot reasonably estimate the ultimate outcome of the litigation (he auditor
believes that there is a reasonable #ossibility of a significant material loss, but the lawsuit is
ade'uately disclosed in the notes to the B7*
@ An entity discloses certain lease obligations in the notes to the B7* (he auditor believes that
the failure to ca#itali4e these leases is a de#arture from ;AA.
A (he entity wishes to show com#arative B7* and include the #rior year Gowever, the #rior year
B7* contained a 'ualification due to an ina##ro#riate method of ;AA. Accordingly,
management corrected the #rior year ;AA. deficiency and included the u#dated numbers in the
com#arative financials for the current year
11 (he entity wishes to show com#arative B7* and include the #rior year Gowever, the #rior
year B7* were audited by another auditor who refuses to reissue his o#inion
8:
List A
O#inion $hoices
List !
+e#ort )odification $hoices
A Jualified
G %escribe the circumstances in an
e9#lanatory #aragra#h preceding the
o#inion #aragra#h w7o modifying the
three standard #aragra#hs
! Dn'ualified
3 %escribe the circumstances in the
o#inion #aragra#h w7o adding an
e9#lanatory #aragra#h
$ Adverse
C %escribe the circumstances in an
o#inion #aragra#h and modify the
o#inion #aragra#h
% %isclaimer
Q %escribe the circumstances in an
e9#lanatory #aragra#h follo(ing the
o#inion #aragra#h and modify the
o#inion #aragra#h
/ /ither Jualified or Adverse
L %escribe the circumstances in an
o#inion #aragra#h and modify the sco#e
N o#inion #aragra#h
B /ither %isclaimer or Adverse
) %escribe the circumstances in an
o#inion #aragra#h and modify the sco#e
N o#inion #aragra#h
; /ither Jualified or %isclaimer
5 %escribe the circumstances in the
sco#e #aragra#h w7o adding an
O %escribe the circumstances in an
o#inion #aragra#h w7o modifying the
three standard #aragra#hs
. %escribe the circumstances in the
introductory #aragra#h w7o adding an
J %escribe the circumstances in the

introductory #aragra#h w7o adding an
e9#lanatory #aragra#h, and modify the
sco#e N o#inion #aragra#hs
+ 3ssue the standard auditor&s re#ort w7o
modification
* 5one of the above
8>
Answer:
1 !, +
, A, L
3 !, 3
2 !, J
8 A, C
: !, 3
> !, +
@ /, C
A !, G
11 !, +
(erms: Audit situations and re'uired re#orts with modifications
%iff: $hallenging
Objective: LO 3-1, LO 3-2, LO 3-8, and LO 3->
,,) Binancial statement users are ty#ically more concerned with an un'ualified re#ort with
e9#lanatory #aragra#hs than they are with a disclaimer of o#inion
A) (rue
!) Balse
Answer: !
(erms: Binancial statement users= Dn'ualified re#ort with e9#lanatory #aragra#hs= %isclaimer of
o#inion
%iff: )oderate
Objective: LO 3->
,3) A lac" of inde#endence will override any other sco#e limitations and re'uires a disclaimer of
o#inion
A) (rue
!) Balse
Answer: A
(erms: Lac" of inde#endence= %isclaimer of o#inion
%iff: )oderate
Objective: LO 3->
,2) ?hen a 'ualified o#inion is issued, an e9#lanatory #aragra#h is added immediately after the
o#inion #aragra#h to e9#lain the nature of the 'ualification that affects the o#inion
A) (rue
!) Balse
Answer: !
(erms: Jualified o#inion e9#lanatory #aragra#h and o#inion #aragra#h
%iff: )oderate
Objective: LO 3->
8@
,8) 3n the case of a disclaimer due to lac" of inde#endence, the entire sco#e #aragra#h is
e9cluded from the re#ort
A) (rue
!) Balse
Answer: A
(erms: %isclaimer of o#inion
%iff: )oderate
Objective: LO 3->
Learning Objective 3-@
1) ?hen accounting #rinci#les are not consistently a##lied, and the materiality level is
immaterial, the auditor will issue aFn):
A) un'ualified o#inion
!) un'ualified o#inion with an e9#lanatory #aragra#h
$) adverse o#inion
%) disclaimer o#inion
Answer: A
(erms: Audit re#ort and different levels of materiality
%iff: )oderate
Objective: LO 3-@
,) (he first ste# to be followed when deciding the a##ro#riate audit re#ort in a given set of
circumstances is to:
A) decide the a##ro#riate ty#e of re#ort for the condition
!) write the re#ort
$) determine whether any conditions e9ists re'uiring a de#arture from a standard un'ualified
re#ort
%) decide the materiality for each condition
Answer: $
(erms: Auditor&s decision #rocess for audit re#orts
%iff: )oderate
Objective: LO 3-@
3) 3n most audits, the auditor issues a:
A) 'ualified audit re#ort
!) un'ualified audit re#ort
$) sco#e limited audit re#ort
%) adverse audit re#ort
Answer: !
(erms: *tandard un'ualified audit re#ort
%iff: $hallenging
Objective: LO 3-@
8A
2) )ore than one modification should be included in the audit re#ort when:
A) the auditor is not inde#endent and the auditor "nows that the com#any has not followed
generally acce#ted accounting #rinci#les
!) there is substantial doubt about the going concern of the com#any and information about the
causes of the uncertainties is not ade'uately disclosed in the footnotes
$) there is a sco#e limitation and there is substantial doubt about the com#any&s ability to
continue as a going concern
%) all of the above
Answer: %
(erms: *tandard re#ort= )ore than one condition re'uiring a de#arture or modification
%iff: )oderate
Objective: LO 3-@
8) ?hen there is a justified de#arture from ;AA. which is considered material, the auditor
should issue aFn):
A) standard un'ualified audit re#ort
!) disclaimer of o#inion
$) un'ualified audit re#ort with an e9#lanatory #aragra#h
%) adverse o#inion
Answer: $
(erms: Audit re#ort and different levels of materiality
%iff: )oderate
Objective: LO 3-@
:) 3f there is a deviation in the statements& #re#aration in accordance with ;AA. and another
accounting #rinci#le was a##lied on a basis that was not consistent with that of the #receding
year:
A) the auditor must choose which modification to include in the audit re#ort
!) only the most material modification can be disclosed
$) more than one modification should be included in the re#ort
%) none of the above
Answer: $
(erms: *tandard re#ort= )ore than one condition re'uiring a de#arture or modification
%iff: )oderate
Objective: LO 3-@
:1
>) After the auditor determines whether any conditions e9ist which re'uire a de#arture from a
standard un'ualified re#ort, the ne9t ste# in the decision #rocess for audit re#orts is to:
A) write the re#ort
!) decide the materiality for each condition
$) decide the a##ro#riate ty#e of re#ort for the condition
%) discuss the re#ort with management
Answer: !
%iff: /asy
Objective: LO 3-@
@) (he final ste# in the auditor&s decision #rocess for audit re#orts is to write the audit re#ort
A) (rue
!) Balse
Answer: A
%iff: /asy
Objective: LO 3-@
A) Academic research is underway to study the effectiveness of communications #rovided by
auditors in the audit re#ort
A) (rue
!) Balse
Answer: A
(erms: +esearch underway on audit re#ort
%iff: )oderate
Objective: LO 3-@
Learning Objective 3-A
1) Auditing standards in the Dnited *tates allow an auditor to #erform an audit of a D* entity in
accordance with both generally acce#ted auditing standards in the D* and the 3*As
A) (rue
!) Balse
Answer: A
(erms: Auditing standards of Dnited *tates and 3nternational *tandards of Auditing
%iff: )oderate
Objective: LO 3-A
:1

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Auditing and Assurance Services, 15e (Arens)

Chapter 3 Audit Reports

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