Deck 18: The Audit Report, Including Reporting on Corporate Governance

Question 1

In an auditor's report on financial statements an unmodified opinion is issued when the auditor is satisfied in all material respects that:

A) The view presented by the financial information as a whole is consistent with the auditor's knowledge of the business of the entity.
B) There are no disagreements with management.
C) Internal controls are consistent in design and operation.
D) The audit has been conducted in accordance with International Standards on Auditing.

Answer 1

The audit has been conducted in accordance with International Standards on Auditing.

Question 2

Wallis & Co. has just been audited and the auditor has found that management have understated provisions for potential losses when valuing work in progress for the current year. The error is material to the financial statements but not pervasive and the directors have refused to correct it. What action should the auditor take?

A) The auditor should issue an unmodified audit report with an Emphasis of Matter Paragraph.
B) The auditor should issue a modified audit report with an adverse audit opinion.
C) The auditor should issue a modified audit report with an 'except for' paragraph.
D) The auditor should immediately resign and inform the shareholders.

Answer 2

The auditor should issue a modified audit report with an 'except for' paragraph.

Question 3

Abacus has just been audited by new auditors and they have found that management have incorrectly calculated the amortisation of goodwill for several years. The previous auditors have failed to detect the error. The error is such that if corrected, the accumulated profits will be turned into an accumulated loss. The directors have refused to correct the error on the grounds that the previous auditors accepted the calculations. ?
What action should the auditor take?

A) The auditor should issue an unmodified audit report with an Emphasis of Matter Paragraph.
B) The auditor should issue a modified audit report with an adverse audit opinion.
C) The auditor should issue a modified audit report with an 'except for' paragraph.
D) The auditor should immediately resign and inform the shareholders.

Answer 3

The auditor should issue a modified audit report with an adverse audit opinion.

Question 4

You are drafting the auditor's report for Happytime Trading. You understand that the report will need to reflect the requirements of ISA 701 Communicating Key Audit Matters in the Independent Auditor's Report. According to ISA 701, which of the following should be included in the 'Key Audit Matters' paragraph in the auditor's report?

A) Matters which required significant auditor attention
B) Matters which result in a modification to the audit opinion
C) All matters which were communicated to those charged with governance
D) All matters which are considered to be material to the financial statements

Question 5

Blinkhorn is currently being audited and the auditor has discovered that the payroll function is outsourced to a third party contractor called Wages R Us The auditor has contacted Wages R Us but they state that are unable to provide them with the payroll records of Blinkhorn as a recent fire has caused a catastrophic loss of data. The wages figure is material to the calculation of the profit or loss for the year. ?
What action should the auditor take?

A) The auditor should issue an unmodified audit report with an Emphasis of Matter Paragraph.
B) The auditor should issue a modified audit report with an adverse audit opinion
C) The auditor should issue a modified audit report with an 'except for' paragraph.
D) The auditor should immediately resign and inform the shareholders.

Question 6

In the UK the auditor should include reference in their report that the company (if applicable) has complied with the provisions of the UK Corporate Governance Code

Question 7

The auditor would have to issue a modified audit report if items of administrative expenditure have been misclassified

Question 8

A limitation of scope modification arises when accessing certain records is difficult for the auditors because they have been retained by an overseas subsidiary

Question 9

Failing to properly disclose the correct figures for directors' remuneration is always material and the auditors have to take this into account in deciding on their audit opinion

Question 10

Newrit Co. is currently being audited and the auditor has discovered that the finance function is outsourced to Jay Co. The auditor has contacted Jay Co. but they are unable to provide them with the any financial records of Newrit Co. due to a recent fire that destroyed all the records. ?
What action should the auditor take?

A) The auditor should issue an unmodified audit report with an Emphasis of Matter Paragraph.
B) The auditor should issue a modified audit report with an adverse audit opinion.
C) The auditor should issue a modified audit report with an 'except for' paragraph.
D) The auditor should issue a disclaimer of opinion.

Question 11

The draft financial statements of BronteCo currently show a profit before tax of $4.8m and revenue of $18m for the financial year ended 31 March 2019. ?
You have been informed that the finance director left BronteCo on 31 May 2018. As part of the subsequent events audit procedures, you reviewed post year-end board meeting minutes and discovered that a legal case for unfair dismissal has been brought against BronteCo by the finance director.
?
BronteCo's lawyers believe that the finance director's claim is likely to be successful, but estimate that $150,000 is the maximum amount of compensation which would be paid.
?
Management does not intend to make any adjustments or disclosures in the financial statements. Which of the following audit opinions will be issued if the unfair dismissal case is not adjusted for or disclosed within the financial statements?

A) A qualified audit opinion as the financial statements are materially misstated
B) A qualified audit opinion as the auditor is unable to obtain sufficient appropriate evidence
C) An unmodified opinion with an emphasis of matter paragraph
D) An unmodified audit opinion

Question 12

?The auditors' report should contain a reference as whether the going concern basis of accounting is appropriate.

Question 13

All audit reports must by law contain a disclaimer to the effect that the report is intended only for the use of the shareholders and no one else.

Question 14

An Emphasis of Matter paragraph is a form of audit modification which is less severe than an 'except for' opinion.

Question 15

The auditors are not required to report on any other matters apart from the financial information.

Question 16

The auditor should disclaim an opinion under certain circumstances. In which one of the following situations would the auditor not be justified in disclaiming their opinion?

A) The auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be both material and pervasive.
B) The auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be material but not pervasive.
C) It is not possible to form an opinion on the financial statements due to the potential interaction of the uncertainties and their possible cumulative effect on the financial statements.
D) The auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion.