cpa audit review ch 16 review 6

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cpa audit review ch 16 review 6
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2014-10-20 23:18:07
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cpa audit review ch 16 review 6
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  1. An external auditor discovers that a payroll supervisor of the firm being audited has misappropriated $10,000. The firm’s total assets and before-tax net income are $14 million and $3 million, respectively. Assuming no other issues affect the report, the external auditor’s report will most likely contain a(n)

    A.Unmodified opinion.

    B.Scope qualification.

    C. Disclaimer of opinion.

    D.Adverse opinion.
    A.Unmodified opinion.

    The auditor is likely to express an unmodified opinion for two reasons. First, the misappropriated amount is immaterial relative to assets and income. Second, as long as the misappropriation is accounted for properly, the financial statements will be fairly presented.
  2. An auditor’s opinion reads as follows: “In our opinion, except for the above-mentioned limitation on the scope of our audit...” This is an example of an

    A.Acceptable qualified opinion.

    B.Acceptable review opinion.

    C.Unacceptable reporting practice.

    D.Acceptable emphasis of a matter.
    C.Unacceptable reporting practice.

    When an opinion is qualified because of a scope limitation, the opinion paragraph should indicate that the qualification pertains to the possible effects on the statements of undetected misstatements (AU-C 705). The language given in the question bases the qualification on the restriction itself and is unacceptable.
  3. A material misstatement results in either a ---------- or an -------- opinion. The auditor must exercise judgment as to whether the misstatement is pervasive. If the misstatement is not pervasive, the auditor should express a ----------- opinion.
    qualified

    adverse

    qualified
  4. A CPA engaged to audit financial statements observes that the accounting for a certain material but not pervasive item is not in conformity with the applicable financial reporting framework, although the matter is prominently disclosed in a note to the financial statements. The CPA should

    A.Qualify the opinion because of the misstatement.

    B.Express an unmodified opinion but insert an emphasis-of-matter paragraph with a reference to the note.

    C.Not allow the accounting treatment for this item to affect the type of opinion because the misstatement was disclosed.

    D.Disclaim an opinion.
    A.Qualify the opinion because of the misstatement.

    When financial statements are materially misstated, but the effects are not pervasive, the auditor should express a qualified opinion if the audit has been in accordance with GAAS. The basis for the opinion should be stated in the report even if full and prominent note disclosure has been made.
  5. A limitation on the scope of the audit sufficient to preclude an unmodified opinion is most likely to result when management

    A.Knows that confirmation of accounts receivable is not feasible.

    B.Discloses material related party transactions in the notes to the financial statements.

    C.Asks the auditor to report on the balance sheet and not on the other basic financial statements.

    D.Refuses to permit its lawyer to respond to the letter of audit inquiry.
    D.Refuses to permit its lawyer to respond to the letter of audit inquiry.

    Direct communication with the entity’s external legal counsel should be made if actual or potential litigation, claims, or assessments may result in a risk of material misstatement. If management refuses to permit this communication, the auditor should modify the opinion.
  6. When the financial statements contain a misstatement, the effect of which is material but not pervasive, the auditor should

    A.Qualify the opinion and describe the misstatement within the opinion paragraph.

    B.Disclaim an opinion and describe the misstatement within the opinion paragraph.

    C.Disclaim an opinion and explain the effect of the misstatement in a disclaimer of opinion paragraph.

    D.Qualify the opinion and include a basis for qualified opinion paragraph that describes the matter resulting in the qualification.
    D.Qualify the opinion and include a basis for qualified opinion paragraph that describes the matter resulting in the qualification.

    When the financial statements are materially misstated, but the effects are not pervasive, the auditor should express a qualified opinion. The report should contain a basis for qualified opinion paragraph preceding the opinion paragraph. If the material misstatement relates to specific amounts, the basis paragraph should describe and quantify the financial effects, if practicable. If the misstatement relates to narrative disclosures, the auditor should include an explanation. If the misstatement relates to an omission of required information, the auditor should describe the nature of the information and, if practicable, include the information. The opinion paragraph should refer to the basis paragraph.
  7. Under which of the following circumstances would the expression of a disclaimer of opinion be inappropriate?

    A.Management does not provide reasonable justification for a change in accounting principles.

    B.The auditor is unable to obtain the audited financial statements of a consolidated investee.

    C.The company failed to make a count of its physical inventory during the year, and the auditor was unable to apply alternative procedures to verify inventory quantities.

    D.Management refuses to allow the auditor to have access to the company’s canceled checks and bank statements.
    A.Management does not provide reasonable justification for a change in accounting principles. 

    When management does not provide reasonable justification for a change in accounting principles, a qualified or adverse opinion should be expressed if the effect is a material misstatement.
  8. Under which of the following circumstances may audited financial statements contain a note that is labeled “unaudited,” disclosing an event occurring after the balance sheet date?

    A.When the event occurs after the date of the auditor’s original report.

    B.When the subsequent event requires adjustment of the financial statements.

    C.When the event occurs after the date of the related financial statements.

    D.When audit procedures with respect to the event were not performed by the auditor.
    A.When the event occurs after the date of the auditor’s original report.

    To prevent the financial statements from being misleading, management may disclose an event that arose after the date of the auditor’s report. If the event is included in a separate note labeled as unaudited [e.g., a note captioned as “Event (Unaudited) Subsequent to the Date of the Independent Auditor’s Report”], the auditor need not perform any procedures on the note. Moreover, the auditor’s report should have the same date as the original report (AU-C 560).
  9. When an auditor expresses an adverse opinion, the opinion paragraph should includeA.

    A description of the uncertainty or scope limitation that prevents an unmodified opinion.

    B.The effects of the material misstatement.

    C.The financial effects of the misstatement.

    D.A direct reference to a separate paragraph disclosing the basis for the opinion.
    D.A direct reference to a separate paragraph disclosing the basis for the opinion.

    An adverse opinion states that the financial statements are not fairly presented in accordance with the applicable financial reporting framework. When an adverse opinion is expressed, the opinion paragraph should directly refer to a basis for adverse opinion paragraph that discloses the basis for the adverse opinion. This paragraph should precede the opinion paragraph (AU-C 705).
  10. The financial statements include a separate statement of changes in equity. This statement should

    A.Be excluded from both the introductory and opinion paragraphs.

    B.Be identified in the introductory paragraph of the report and must be reported on separately in the opinion paragraph.

    C.Be identified in the introductory paragraph of the report but need not be reported on separately in the opinion paragraph.

    D.Not be identified in the introductory paragraph but should be reported on separately in the opinion paragraph.
    C.Be identified in the introductory paragraph of the report but need not be reported on separately in the opinion paragraph.

    The balance sheet, statement of income, statement of changes in equity, and statement of cash flows are the financial statements upon which the auditor customarily reports. The introductory paragraph identifies the titles of the entity’s financial statements. However, the statement of changes in equity and a separate statement of comprehensive income are not separately reported on the opinion paragraph. The reason is that changes in equity and comprehensive income are included in financial position, results of operations, and cash flows.
  11. A major purpose of the auditor’s report on financial statements is to

    A.Deter creditors from extending loans in high-risk situations.

    B.Clarify for the public the nature of the auditor’s responsibility and performance.

    C.Assure investors of the complete accuracy of the financial statements.

    D.Describe the specific auditing procedures undertaken to gather evidence for the opinion.
    B.Clarify for the public the nature of the auditor’s responsibility and performance.

    One of the highest priorities of the AICPA has been to reduce the gap between the nature of the auditor’s responsibility and performance and the public’s perception of the audit function. The auditor’s report issued in accordance with auditing standards clarifies the role of the auditor with the intention of diminishing the gap.

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