Deck 12: The Auditors Reporting Obligations

Question 1

Your client has followed approved accounting standards but a note to the financial report indicates the early application of an accounting standard that has a pervasive effect on the financial report in advance of its effective date.The note details the reasons for this view.You, as the auditor, concur that this additional note disclosure is necessary to give a true and fair value.What type of opinion should you issue?

A)An unmodified opinion with an Emphasis of Matter.
B)A disclaimer of opinion.
C)An unmodified opinion.
D)A qualified opinion or adverse opinion.

Answer 1

A

Question 2

When an auditor expresses an adverse opinion, the opinion paragraph should include:

A)a direct reference to a separate paragraph in the auditor's report disclosing the basis for the opinion.
B)the principal effects of the departure from generally accepted accounting principles.
C)a description of the uncertainty or scope limitation that prevents an unmodified opinion.
D)the substantive reasons for the financial statements being misleading.

Answer 2

A

Question 3

Muir Ltd is required to but does not wish to prepare and issue a statement of cash flows as part of its financial report.In these circumstances, the auditor's report should include:

A)an adverse opinion stating that the financial report, taken as whole, is not fairly presented because of the omission of the required statement.
B)an unmodified opinion with a statement of cash flows prepared by the auditor included as part of the auditor's report.
C)an unmodified opinion with an Emphasis of Matter section explaining that the company declined to present the required statement.
D)a disclaimer of opinion with a separate explanatory paragraph stating why the company declined to present the required statement.

Answer 3

A

Question 4

A solicitor limits a response concerning a litigation claim because the solicitor is unable to determine the likelihood of a favourable outcome.Which type of opinion should the auditor express if the litigation is adequately disclosed and the range of potential loss is material in relation to the client's financial report considered as a whole?

A)Qualified.
B)Unmodified with an Other Matter paragraph.
C)Unmodified with an Emphasis of Matter paragraph.
D)Unmodified.

Question 5

The basic elements of the auditor's standard report for a Corporations Act 2001 audit include all of the following except:

A)a title that includes the word 'independent'.
B)a statement that the financial report is the responsibility of the company's directors.
C)a statement that accounting estimates are reasonable, but that there will normally be differences between estimated and actual results.
D)a statement that an audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial report.

Question 6

When restrictions are imposed by the client that significantly limit the auditor's ability to audit fixed assets (a material part of the balance sheet), the auditor generally should issue which of the following opinions?

A)Unmodified with an Emphasis of Matter.
B)Qualified.
C)Disclaimer.
D)Adverse.

Question 7

Your client, Sharpe Ltd, is being sued by one of its competitors for $40 million for an alleged patent infringement.Your client has assets of $80 million and a reported profit of $20 million.The client has disclosed the lawsuit in a note to the accounts along with a statement indicating that they intend to vigorously defend the suit and are confident of winning the suit.Your independent legal advice supports this view and you are satisfied with the details provided by the client in the notes to the accounts.What type of opinion should you express on the financial report of Sharpe Ltd?

A)An unmodified opinion with an Emphasis of Matter.
B)A disclaimer of opinion.
C)An unmodified opinion.
D)A qualified opinion or adverse opinion.

Question 8

If the auditor believes that there is minimal likelihood that resolution of an uncertainty will have a material effect on the financial report, the auditor would issue a(n):

A)adverse opinion.
B)qualified opinion.
C)disclaimer of opinion.
D)unmodified opinion.

Question 9

The auditor's report now requires a description of key audit matters, which are:

A)matters that are agreed between the auditor and the audit committee and are of most significance in their audit of the financial report.
B)matters that are agreed between the auditor and the audit committee and are of most significance in their audit of the financial report.matters that, in the auditor's professional judgment, are of most significance in their audit of the financial report.
C)the significant differences between what is disclosed in a financial report prepared in accordance with the financial reporting framework and what is necessary to provide a true and fair view.
D)matters which have been brought to the attention of the auditor by the audit inspection process, but are not reflected in the financial report.

Question 10

When an adverse opinion is expressed, the opinion paragraph should include a direct reference to:

A)the paragraph outlining the auditor's responsibility, which discusses the basis for the opinion rendered.
B)a footnote to the financial report that discusses the basis for the opinion.
C)the consistency or lack of consistency in the application of accounting principles.
D)a separate qualification paragraph that discusses the basis for the opinion rendered.

Question 11

For the purposes of the approved auditing standards, what are the differences, if any, between the phrases 'true and fair view' and 'presents fairly, in all material respects'?

A)The phase 'true and fair view' is used for fair presentation frameworks while the phrase 'presents fairly, in all material respects' is used for compliance frameworks.
B)The two phrases are equivalent.
C)The phase 'true and fair view' is used for general-purpose financial reporting frameworks while the phrase 'presents fairly, in all material respects' is used for special purpose financial reporting frameworks.
D)The phase 'true and fair view' is used for reasonable assurance reports while the phrase 'presents fairly, in all material respects' is used for limited assurance reports.

Question 12

When a financial report is presented that is not in conformity with accounting standards, an auditor may issue Qualified opinion Disclaimer of opinion

A)Yes Yes
B)Yes No
C)No No
D)No Yes

Question 13

Which of the following statements is true for fair presentation frameworks? A fair presentation framework:

A)allows for circumstances where additional note disclosures beyond the reporting framework may be necessary.
B)allows for circumstances where it may be necessary to depart from a requirement of a reporting framework to achieve fair presentation.
C)allows for circumstances where additional note disclosures beyond the reporting framework may be necessary and allows for circumstances where it may be necessary to depart from a requirement of a reporting framework to achieve fair presentation.
D)requires strict conformance to a reporting framework to achieve fair presentation.

Question 14

Your client has followed approved accounting standards but a note to the financial report indicates that the application of certain standards results in the financial report being materially misstated.The note details the reasons for this view.You do not concur with this view.What type of opinion should you issue?

A)An unmodified opinion with an Emphasis of Matter.
B)A disclaimer of opinion.
C)An unmodified opinion.
D)A qualified opinion or adverse opinion.

Question 15

The information gap is:

A)the difference between what information the auditors know and what they should know when they complete the audit.
B)is the same as the expectations gap.
C)the difference between what users believe is needed to make informed investment decisions and what is currently available to them.
D)the difference between what auditors need to issue a limited assurance report and what they need to issue a reasonable assurance report.

Question 16

Which combination of the following three possibilities for improving the communication effectiveness has been adopted in the recently enhanced standard form auditor's report? I: Giving the auditor's opinion on the financial report greater emphasis by placing it at the beginning of the auditor's report.
II: Allowing for changing the presentation and positioning of generically-worded paragraphs explaining the respective responsibilities of management (or those charged with governance) and of the auditor to make them more useful.
III: The auditor providing additional information about key audit matters.

A)I and II only.
B)I and III only.
C)II and III only.
D)All of I, II and III.

Question 17

For a Corporations Act 2001 audit, the auditor has reporting obligations to:

A)management and the board of directors.
B)the employees and their union representatives.
C)International Federation of Independent Audit Regulators (IFIAR).
D)All of the given answers.

Question 18

An auditor was unable to obtain an audited financial report or other evidence supporting an entity's investment in a foreign subsidiary considered material to the financial report.Between which of the following opinions should the entity's auditor choose?

A)Qualified and disclaimer.
B)Qualified and adverse.
C)Disclaimer and unmodified with an Emphasis of Matter.
D)Adverse and unmodified with an Emphasis of Matter.

Question 19

How are the governing body's and auditor's responsibilities stated in the current auditor's report? Governing body's responsibility Auditor's responsibility

A)Implicitly Implicitly
B)Explicitly Explicitly
C)Explicitly Implicitly
D)Implicitly Explicitly

Question 20

The Corporations Act 2001 requires the auditor to report on certain matters only on an exception basis.This means that the auditor need only report particulars of any deficiency, failure or shortcoming in respect of these matters.Which of the following matters should not be reported on an exception basis?

A)Whether the company has kept financial records sufficient to enable a financial report to be prepared and audited.
B)Whether the company has kept registers required by the Act.
C)Whether the auditor has been given all the information and assistance necessary for the conduct of the audit.
D)Whether the financial report provides a true and fair view.

Question 21

Higgins Insurance Ltd is trading profitably at 30 June 20X0 as reflected in its financial report.On 24 July 20X0 there is a hailstorm in Sydney that creates unprecedented damage.Although Higgins had undertaken all the normal reinsurance processes, it is unlikely that they will be able to pay all claims and there is a high probability that the company will have to be wound up.The auditor believes that the financial report as at 30 June 20X0 is true and fair and that this natural disaster is adequately disclosed.The auditor should issue:

A)a disclaimer of opinion.
B)an unmodified opinion with an Emphasis of Matter.
C)an adverse opinion.
D)a qualified opinion.

Question 22

An entity operates in a highly regulated industry with special, legislated reporting requirements, with which it has complied.However, this has resulted in it not complying with the requirements of some Australian Accounting Standards.Note 1 to the accounts states that the accounts are prepared in conformity with both the special legislated reporting requirements and the Australian Accounting Standards.What type of audit opinion should be issued?

A)An adverse opinion.
B)A qualified opinion.
C)An unmodified opinion with regards the special legislation and a qualified opinion with regards to the departure from Australian Accounting Standards.
D)An unmodified opinion with an Emphasis of Matter paragraph.

Question 23

On 2 July 20X0 Fluro Paint Ltd received a notice from its primary suppliers that all wholesale prices would be increased by 10 per cent, to be effective immediately.On the basis of the notice Fluro Paint Ltd revalued its 30 June 20X0 inventory to reflect the higher costs.The details of the adjustment were disclosed in the notes to the financial report.The inventory adjustment was material.The auditor of the 30 June 20X0 financial report would issue:

A)an unmodified opinion with an Emphasis of Matter of disclosure.
B)a disclaimer of opinion.
C)a qualified opinion.
D)an unmodified opinion.

Question 24

The financial report of Fast Dollar Ltd indicates that there may be some going concern problems.However, the auditor concludes, based on mitigating factors, that the client will most likely continue as a going concern during the next year.The mitigating factors are adequately disclosed in the accounts.What type of audit opinion should the auditor express?

A)Disclaimer of opinion.
B)Unmodified opinion.
C)Qualified or adverse opinion.
D)Unmodified opinion with a Material Uncertainty Related to Going Concern paragraph.

Question 25

Your audit client has not written inventory down to net realisable value in accordance with approved accounting standards.The write-down would reduce current assets by 8 per cent and net profit before income tax by 12 per cent.What type of auditor's report should you issue?

A)An unmodified opinion with an Emphasis of Matter paragraph.
B)A disclaimer of opinion.
C)An adverse opinion.
D)A qualified opinion.

Question 26

Coggin Ltd changed from the straight-line method to the declining balance method of depreciation for all newly acquired assets.This change has no material effect on the current year's financial report but is reasonably certain to have a substantial effect in later years.If the change is adequately disclosed in the notes to the financial report the auditor should issue a report with a(n):

A)consistency modification.
B)unmodified opinion.
C)explanatory paragraph.
D)qualified opinion.

Question 27

An auditor has been unable to obtain the audited financial report for the entity's major foreign subsidiary due to civil unrest in that country.The appropriate auditor's report is:

A)an unmodified opinion on the consolidated accounts but a qualified opinion on the parent company's accounts.
B)an unmodified opinion with an Emphasis of Matter paragraph.
C)a qualified opinion or a disclaimer of opinion.
D)a qualified opinion or an adverse opinion.

Question 28

Juan Donald, an independent auditor, was engaged to perform an audit of the financial report of Pinnacle Ltd one month after its financial year had ended.Although the inventory count was not observed by Donald and accounts receivable were not confirmed by direct communication with debtors, Donald was able to gain satisfaction by applying alternative auditing procedures.Donald's auditor's report will probably contain:

A)an unmodified opinion and an Emphasis of Matter paragraph.
B)a qualified opinion.
C)an unmodified opinion.
D)either a qualified opinion or a disclaimer of opinion.

Question 29

Cassidy Ltd, a listed company, refuses to separately disclose directors' fees of $2.5 million on the basis that they believe they are quantitatively immaterial.Profit for the last year was $980 million.The auditor should issue a(n):

A)adverse opinion.
B)qualified opinion.
C)unmodified opinion with an Emphasis of Matter paragraph.
D)unmodified opinion.

Question 30

An entity is facing significant litigation as a result of dumping oil in the ocean.This is adequately disclosed in the notes to the financial report.The appropriate auditor's report is:

A)a qualified opinion.
B)an unmodified opinion with an Other Matter paragraph.
C)an adverse opinion.
D)an unmodified opinion with an Emphasis of Matter paragraph.

Question 31

The auditor of Kennedy Ltd has serious doubts that the entity will continue as a going concern.There is adequate disclosure of this significant uncertainty in the notes to the financial report.The uncertainty is the result of a single factor affecting the client.What type of audit opinion should the auditor express?

A)Unmodified opinion with an Other Matter paragraph.
B)Qualified opinion.
C)Adverse opinion.
D)Unmodified opinion with a Material Uncertainty Related to Going Concern paragraph.

Question 32

When a client will not make essential corporate minutes available to the auditor, the auditor's report will probably contain a(n):

A)unmodified opinion with a Material Uncertainty Related to Going Concern paragraph.
B)unmodified opinion.
C)unmodified opinion with an Emphasis of Matter paragraph.
D)qualified opinion.

Question 33

Swift Ltd has disclosed the fact that they are being sued for $3 million.Swift Ltd reported a profit for the year of $300 million and has total assets of $75 million.You conclude that disclosure of the litigation is adequate.What type of opinion should you express on the financial report of Swift Ltd?

A)Disclaimer of opinion.
B)Unmodified opinion with an Emphasis of Matter.
C)Unmodified opinion.
D)Qualified opinion or adverse opinion.

Question 34

At the end of the audit the auditor has two issues outstanding.The first is a disagreement with those charged with governance concerning the use of an inappropriate valuation method for inventory (LIFO).The second issue is significant uncertainty as to whether the entity will continue as a going concern, which is adequately disclosed in the notes to the accounts.What type of audit opinion should the auditor express?

A)Qualified opinion with a Material Uncertainty Related to Going Concern paragraph..
B)Unmodified opinion.
C)Qualified opinion.
D)Unmodified opinion with a Material Uncertainty Related to Going Concern paragraph.

Question 35

An auditor concludes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time.If the entity's disclosures concerning this matter are adequate, the auditor's report may include: Disclaimer of opinion Qualified opinion

A)Yes No
B)No Yes
C)No No
D)Yes Yes

Question 36

The directors of a listed company refuse to disclose directors' remuneration of $400 000 on the basis that it is not material.Net profit after tax is $25 million and net assets are $100 million.The appropriate auditor's report is:

A)unmodified with an Emphasis of Matter paragraph.
B)unmodified opinion.
C)a qualified opinion.
D)a disclaimer of opinion.

Question 37

Richards Ltd has reported losses two years in a row and has a debt to total assets ratio of 0.90.In addition, a $5 million debenture is maturing next year and the company has not set aside any funds to repay the debt.The parent entity of Richards Ltd has decided to repay the debenture when it matures and provide sufficient funding to cover any additional losses that Richards Ltd might incur.Richards Ltd has not disclosed these arrangements in its financial report and the auditor is adamant that it should be brought to the shareholders' attention.What type of opinion should the auditor express on the financial report of Richards Ltd?

A)Disclaimer of opinion.
B)Unmodified opinion with an Emphasis of Matter.
C)Unmodified opinion with a Material Uncertainty Related to Going Concern paragraph.
D)Qualified opinion or adverse opinion.

Question 38

The financial report of Charger Ltd indicates that there are going concern problems.After considering additional audit evidence, the auditor concludes that the client will not continue as a going concern during the next year.What type of audit opinion should the auditor express?

A)Disclaimer of opinion.
B)Qualified opinion.
C)Adverse opinion.
D)Unmodified opinion with a Material Uncertainty Related to Going Concern paragraph.

Question 39

Costello, as principal auditor for the consolidated financial report, finds that the audit of a major subsidiary is qualified by another auditor.Costello does not consider the qualification to be material relative to the consolidated financial report.What recognition, if any, must Costello make in his auditor's report to the qualified report of the auditor of the subsidiary?

A)He must refer to the qualification of the other auditor and qualify his report likewise.
B)He need make no reference.
C)He must include the other auditor's report with his report and give an explanation of its significance.
D)He must include the other auditor's report with his report but need not qualify his report.

Question 40

Due to time and staff restrictions the auditor was unable to attend the inventory stocktake at a remote branch location for Outback Ltd.The inventory at this site accounted for 30 per cent of total assets.Alternative procedures were applied satisfactorily.The auditor should issue:

A)an unmodified opinion.
B)an unmodified opinion with an Emphasis of Matter.
C)a disclaimer of opinion.
D)a qualified opinion.

Question 41

When a contingency is resolved immediately subsequent to the issuance of a report that was modified with respect to the contingency, the auditor should:

A)inform the audit committee that the report cannot be relied upon.
B)insist that the client issue a revised financial report.
C)inform the appropriate authorities that the report cannot be relied upon.
D)take no action regarding the event.

Question 42

If an entity's external auditor expresses an unmodified opinion as a result of the audit of the entity's financial report, readers of the auditor's report can assume that:

A)the entity is financially sound and the financial report is accurate.
B)the external auditor found no irregularities.
C)all material disagreements between the entity and the external auditor about the application of accounting principles were resolved to the satisfaction of the auditor.
D)the internal control structure is effective.

Question 43

When a client declines to include a statement of cash flows in its financial report, the auditor's report will usually:

A)include a separate paragraph that summarises the company's financing and investing activities.
B)contain either a qualified or adverse opinion because of inadequate disclosure.
C)refer to the scope limitation.
D)contain either a qualified opinion or a disclaimer of opinion on the basis of the uncertainty caused by this disagreement with those charged with governance.

Question 44

Prince, an auditor, was engaged to audit the financial report of Randwick Company after its financial year had ended.Prince neither observed the inventory count nor confirmed the receivables by direct communication with debtors but was satisfied concerning both after applying alternative procedures.'Prince's auditor's report most likely contained a(n):

A)unmodified opinion with an explanatory paragraph.
B)unmodified opinion.
C)disclaimer of opinion.
D)qualified opinion.

Question 45

With respect to the auditor's duty to determine that certain matters related to the conduct of the audit are communicated to the audit committee, the communication:

A)may be oral or written and may be made before or after issuing the auditor's report.
B)should be written and occur before issuing the auditor's report.
C)should be written and may be incorporated in the auditor's report or issued separately as of the auditor's report date.
D)should be reported, preferably in writing, during the course of the audit.

Question 46

An auditor concludes that there is a material inconsistency in the other information in an annual report to shareholders containing an audited financial report.If the auditor concludes that the financial report does not require revision (it is the other information which is inconsistent with the auditor's knowledge) but the client refuses to revise or eliminate the material inconsistency, the auditor may:

A)issue a qualified opinion after discussing the matter with the client's board of directors.
B)consider the matter closed since the other information is not in the audited financial report.
C)revise the auditor's report to include an Emphasis of Matter paragraph describing the material inconsistency.
D)revise the auditor's report to include an Other Matter paragraph describing the material inconsistency.

Question 47

Which of the following statements is not true with regards to the auditor's responsibility where a client entity decides to publish its audited financial report on its website.

A)The auditor should review the website to make sure the auditor's report cannot be attached to or be seen as covering any information that the auditor's report was not intended to cover.
B)The auditor may decide to provide a separate auditor's report for electronic dissemination.
C)The auditor should structure the engagement to audit the financial report published on the website as a separate audit engagement, have the client sign a separate engagement letter and undertake appropriate additional audit procedures.
D)The auditor should consider the risks of whether the financial report on the website is in accordance with the published financial report.

Question 48

In which of the following circumstances would an adverse opinion be appropriate?

A)An uncertainty prevents the issuance of an unmodified report.
B)The auditor is not independent with respect to the enterprise being audited.
C)A client-imposed scope limitation prevents the auditor from complying with the auditing standards.
D)The financial report is prepared on the going concern basis when it is not appropriate.

Question 49

All of the following are true with respect to the auditor's consideration of information other than the audited financial report that are included in a client's annual report except:

A)the auditor must consider whether the other information is consistent with the information contained in the audited financial statements.
B)the auditor is under no obligation to perform audit procedures on this other information.
C)the auditor must perform audit procedures on this other information.
D)the auditor must request that material inconsistencies be corrected.

Question 50

An auditor would issue an adverse opinion if:

A)a qualified opinion cannot be given because the auditor lacks independence.
B)the audit was begun by other independent auditors who withdrew from the engagement.
C)the financial report taken as a whole does not fairly present the financial condition and results of operations of the entity.
D)the restriction on the scope of the audit was significant.

Question 51

When an audited financial report is presented in a client's annual report containing other information, the auditor should:

A)add an explanatory paragraph to the auditor's report without changing the opinion on the financial report.
B)perform inquiry and analytical procedures to ascertain whether the other information is reasonable.
C)read the other information to determine whether it is consistent with the audited financial report.
D)perform the appropriate substantive auditing procedures to corroborate the other information.

Question 52

When the audited financial report of the prior year is presented together with those of the current year, the continuing auditor's report covers:

A)only the current year.
B)both years.
C)only the current year, but the prior year's report should be referred to.
D)only the current year, but the prior year's report should be presented.

Question 53

An auditor concludes that there is a material inconsistency in the other information in an annual report to shareholders containing an audited financial report.If the auditor concludes that the financial report does require revision, but the client refuses to revise or eliminate the material inconsistency, the auditor may:

A)consider the matter closed since the other information is not covered by the audited financial report.
B)issue a qualified opinion after discussing the matter with the client's board of directors.
C)revise the auditor's report to include an Emphasis of Matter paragraph describing the material inconsistency.
D)disclaim an opinion on the financial report after explaining the material inconsistency in a separate explanatory paragraph.

Question 54

Information in the chairman's address, accompanying the financial report in an entity's annual report, is inconsistent with information contained in the audited financial report.The entity refuses to alter the chairman's address.The appropriate auditor's report is:

A)an unmodified opinion with an Other Matter paragraph.
B)a qualified opinion.
C)an unmodified opinion.
D)an unmodified opinion with an Emphasis of Matter paragraph.

Question 55

Which of the following situations will not result in modification of the auditor's report because of a scope limitation?

A)Restriction imposed by the client.
B)Reliance placed on the report of another auditor.
C)Inability to obtain sufficient competent evidential matter.
D)Inadequacy in the accounting records.

Question 56

When an audited financial report is presented in a document containing other information, the auditor:

A)has an obligation to perform auditing procedures to corroborate the other information.
B)is required to issue a qualified opinion if the other information has a material misstatement of fact.
C)should read the other information to consider whether it is inconsistent with the audited financial report.
D)has no responsibility for the other information because is not part of the basic financial report.

Question 57

An auditor's report on comparative financial reports should be dated as of the date of the:

A)last subsequent event disclosed in the financial report.
B)latest financial report being reported on.
C)completion of the auditor's recent evidence collection procedures.
D)issuance of the report.

Question 58

Under which of the following sets of circumstances might an auditor disclaim an opinion?

A)There are significant uncertainties affecting the financial report.
B)There has been a material change between periods in the method of the application of accounting principles.
C)The principal auditor decides to make reference to the report of another auditor who disclaimed an opinion on the audit of a subsidiary.The subsidiary contributed 6 per cent of operating revenue and profit but very little in other aspects.
D)The financial report contains a departure from generally accepted accounting principles, the effect of which is material.

Question 59

The auditor's best course of action with respect to 'other financial information' included in an annual report containing the auditor's report is to:

A)consider whether the 'other financial information' is accurate by performing a review engagement.
B)indicate in the auditor's report that the 'other financial information' is unaudited.
C)read and consider the manner of presentation of the 'other financial information'.
D)obtain written representations from management as to the material accuracy of the 'other financial information'.

Question 60

Certain circumstances, while not affecting the auditor's opinion on the financial report, may require the auditor to add an Emphasis of Matter paragraph to the report.These circumstances include all of the following except where:

A)there is significant uncertainty about the entity's ability to continue as a going concern.
B)the entity is facing significant litigation.
C)there is early application of a new accounting standard that has a pervasive effect on the financial report before its effective date.
D)there is a matter involving a significant uncertainty that is not adequately disclosed.