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Exam 3: Audit Reports

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Question 51

Multiple Choice

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If the financial statements include an income statement and a balance sheet but exclude the statement of cash flows, the auditors:

A) can issue an unqualified report.
B) should issue a qualified opinion due to the departure from GAAP.
C) should issue a qualified opinion because the missing statement of cash flows constitutes a scope limitation.
D) should include the statement of cash flows, modify the report and issue an unqualified opinion.

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

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Question 52

Multiple Choice

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If there is a deviation in the statements' preparation in accordance with GAAP, and another accounting principle was applied on a basis that was not consistent with that of the preceding year:

A) the auditor must choose which modification to include in the audit report.
B) only the most material modification can be disclosed.
C) more than once modification should be included in the report.
D) none of the above.

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

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Question 53

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A CPA may wish to emphasize specific matters regarding the financial statements even though an unqualified opinion will be issued. Normally, such explanatory information is:

When other auditors are involved in the audit and they qualify their portion of the audit, the principle auditor must decide if the amount in question is material to the financial statements as a whole.

Indicate which changes would require an explanatory paragraph in the audit report.

Whenever an auditor issues a qualified report, he or she must use the term "except for" in the opinion paragraph.

To emphasize the fact that the auditor is independent, a typical addressee of the audit report could be:

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

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, 2011 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 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 statement6s do not include any adjustments that might result from the outcome of this uncertainty." This statement is misleading and should be omitted.

What type of audit opinion does the independent auditor issue when the following financial statements are not presented?

When a pervasive scope limitation exists:

All of the following would require an emphasis of matter paragraph except for:

The following is a portion of a qualified scope and opinion report due to a scope restriction. (Note: A separate report was issued on the effectiveness of internal control over financial reporting.) Independent Auditor's Report To the shareholders of Fast Times Corporation We have audited the accompanying balance sheet of Fast Times Corporation as of September 30, 2012, and the related statements of income, retained earnings, and cash flows for the year then ended, and the related notes to the financial statements. Basis for Qualified Opinion We were unable to obtain audited financial statements supporting the company's investment in a foreign affiliate stated at $1,040,000, or its equity in earnings of that affiliate of $501,000, which is included in net income, as described in Note 14 to the financial statements. Because of the nature of the company's records, we were unable to satisfy ourselves as to the carrying value of the investment or the equity in its earnings by means of other auditing procedures. Required: Prepare the opinion paragraph for the above audit report. Do not date or sign the report.

When the auditor concludes that there is substantial doubt about the entity's ability to continue as a going concern, the appropriate audit report could be: I. an unqualified opinion with an explanatory paragraph. II. a disclaimer of opinion.

When an auditor issues a qualified report due to a scope limitation an explanatory paragraph is normally added. Which, if any, of the following paragraphs are also modified?

The introductory paragraph of the auditor's report states that the auditor is responsible for the preparation, presentation and opinion on financial statements.

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

Client imposed restrictions on the audit always require a disclaimer of opinion.

All of the following are conditions requiring a departure from a standard unqualified audit report except:

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?