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Exam 3: Audit Reports

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Question 21

Multiple Choice

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Whenever the client imposes restrictions on the scope of the audit, the auditor should be concerned that management may be trying to prevent discovery of misstatements.In such cases, the auditor will likely issue a:

A) disclaimer of opinion in all cases.
B) qualification of both scope and opinion in all cases.
C) disclaimer of opinion whenever materiality is in question.
D) qualification of both scope and opinion whenever materiality is in question.

E) B) and C)
F) A) and D)

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Question 22

Multiple Choice

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Which of the following are changes that affect the comparability of financial statements but not the consistency and therefore, do not have to be included in the auditor's report?

A) Error corrections not involving principles
B) Changes in accounting estimates
C) Variations in the format and presentation of financial information
D) All of the above

E) B) and D)
F) A) and C)

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Question 23

Multiple Choice

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The standard unqualified audit report:

Users of the financial statements rely on the auditor's report because of the absolute assurance the report provides.

For the report containing a disclaimer for lack of independence, the disclaimer is in the:

If the auditor lacks independence, a disclaimer of opinion must be issued:

Discuss how materiality affects audit reporting decisions.

William Gregory, CPA, is the principal auditor for a multi-national corporation.Another CPA has examined and reported on the financial statements of a significant subsidiary of the corporation.Gregory is satisfied with the independence and professional reputation of the other auditor, as well as the quality of the other auditor's examination.With respect to his report on the consolidated financial statements, taken as a whole, Gregory:

Smith and Jones, CPAs, audited the consolidated financial statements of Concord Inc.and all but one of its subsidiaries for the year ended September 30, 2012 and are expressing an unqualified opinion on the financials presented as a whole. Smith, the engagement partner, instructed Mary, an assistant on the engagement, to draft the auditor's report on November 4, 2012, the date of fieldwork completion.In drafting the report Mary considered the following: •In preparing its financial statements, Concord changed its method of accounting for research and development costs and properly expensed these amounts.Management described the change in principle in Note 10 to the consolidated financial statements. •Ball & Brown, CPAs, audited the financial statements of Biotherm, Inc., a consolidated subsidiary of Concord for the year ended September 30, 2012.The subsidiary's financial statements reflect total assets of 22% and total revenues of 20% of the consolidated totals.Ball & Brown expressed an unqualified opinion and furnished to Smith & Jones a copy of their auditor report.Smith & Jones have decided not to assume responsibility for the work of Ball & Brown insofar as it relates to the expression of an opinion on the consolidated financial statements taken as a whole because of the materiality of Biotherm's financial statements to the consolidated whole.Ball & Brown's report will not be presented together with that of Smith & Jones. •Concord is the subject of a grand jury investigation into possible violations of federal antitrust laws and possible related crimes.Related civil class actions are pending.Concord's management has adequately disclosed in Note 12 to their consolidated financial statements.Because of the early stage of the investigation, the ultimate outcome of these matters cannot be determined at this time.Therefore, no provision for any liability that may result has been recorded. •Concord experienced a net loss in 2012 and is currently in default under substantially all of its debt agreements.Management's plans in regard to these matters are adequately disclosed in Note 14 to Concord's consolidated financial statements.The financials do not include any adjustments that might result from the outcome of this uncertainty.These matters rase substantial doubt about Concord's ability to continue as a going concern. Ball reviewed Mary's draft and indicated in his review notes that there were many deficiencies in Mary's Draft.The audit report that Mary drafted follows. Independent Auditor's Report We have audited the consolidated financial statements of Concord, Inc., and subsidiaries as of September 30, 2012, and the related consolidated statements of income, changes in stockholders equity and cash flows for the year then ended.These financial statements are the responsibility of the Company's management.Our responsibility is to express an opinion on these financial statements based on our audits.We did not audit the financial statements of Biotherm, Inc., a wholly-owned subsidiary, which statements reflect total assets and revenues constituting 22% and 20% respectively at September 30, 2012 of the consolidated totals.Those statements were audited by Ball & Brown, CPAs, whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts included for Biotherm, Inc.is based solely on their report. We conducted our audit in accordance with generally accepted auditing standards.Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.An audit also includes assessing the accounting principles used, as well as assessing control risk.We believe our audits provide a reasonable basis for our opinion. In our opinion, based on our audit and the report of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Concord Inc., as of September 30, 2012 in conformity with generally accepted accounting principles, except for the uncertainty, which is discussed in Note 12 to the consolidated financials. The accompanying consolidated financial statements have been prepared assuming that the Company will continue in existence for a reasonable period of time.As discussed in Note 14 to the consolidated financial statements, the Company suffered a net loss and is currently in default under substantially all of its debt agreements.Management's plans in regard to these matters are also described in Note 14.The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Smith & Jones, CPAs November 4, 2012 Required: The following items present some of the deficiencies in the drafted audit report noted by Smith.For each deficiency, indicate whether: S.Smith's review note is correct M.Mary's draft is correct B.Both Smith's review note and Mary's draft are incorrect Smith's Review Notes 1.An explanatory paragraph is required between the scope and opinion paragraphs is required for the change in accounting principles referring the reader to Note 10. 2.The names of the other auditors do not need to be explicitly stated in the introductory paragraph.Only that "other auditors" performed the audit and provided their report. 3.The opinion paragraph should extend the auditor's opinion beyond financial position to include the results of Concord's operations and flows. 4.The reference to the uncertainty in the opinion paragraph is incomplete.It should describe the nature of the uncertainty as pertaining to the grand jury investigation into possible violations of federal antitrust laws. 5.The explanatory paragraph following the opinion paragraph does not include the terms "substantial doubt" and "going concern".These terms are required to be used in this paragraph. 6.The explanatory paragraph following the opinion paragraph includes an inappropriate statement that "the consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty." This statement is misleading and should be omitted.

Which of the following is a correct statement regarding materiality?

The dollar amount of some misstatements cannot be accurately measured.For example, if the client were unwilling to disclose an existing lawsuit, the auditor must estimate the likely effect on:

The phrase "generally accepted accounting principles" can be found in the opinion paragraph of a standard unqualified report.

When there is a justified departure from GAAP which is considered material, the auditor should issue a(n) :

AICPA auditing standards provide uniform wording for the auditor's report to enable users of the financial statements to understand the audit report.

After the balance sheet date but prior to issuance of the auditor's report the auditor learns that the client's facility in a foreign country has been expropriated.Management refuses to disclose this information in a financial statement footnote or present pro-forma data as to the effect of the event.The auditor should:

The explanatory paragraph for a qualified opinion would:

In which situation would the auditor be choosing between "except for" qualified opinion and an adverse opinion?

In which of the following circumstances would an auditor most likely express an adverse opinion?

No reference is made in the auditor's report to other auditors who perform a portion of the audit when: I.The other auditor audited an immaterial portion of the audit. II) The other auditor is well known or closely supervised by the principle auditor. III) The principle auditor has thoroughly reviewed the work of the other auditor.

When a qualified or adverse opinion is issued, the qualifying paragraph is inserted: