Deck 3: Audit Reports

Question 1

Presented below is an independent auditor's report for a private company prepared by the firm of Harrington and Perry, LLP.
Auditor's Report
To the president and management of EPM, Inc.
We have examined the accompanying balance sheets and statements of income, retained earnings, and cash flows of EPM, Inc., as of December 31, 2012 and 2011. We performed our examination in accordance with auditing standards generally accepted in the United States of America and examined, on a test basis, evidence supporting the accounting principles used and estimates made by management.
In our opinion, the financial statements referred to above accurately present the financial position of EPM, Inc., in conformity with generally accepted accounting principles.
Harrington and Perry, LLP
December 31, 2012
Other information:
EPM, Inc., is a for-profit corporation and publishes comparative financial statements for distribution to shareholders, potential investors, and the general public. The client has a calendar year-end. For the most recent audit, the auditor completed all significant fieldwork on March 5, 2013 and issued the audit report on March 16, 2013. During 2012, EPM changed its method of depreciating long-term assets and properly reflected the effect of the change in the current year's financial statements, restated the prior year's financial statements, and properly discussed the change in a footnote (Note 4) to those statements. The auditors are satisfied that the change was preferable.
Required:
Consider all the facts given and rewrite the complete auditor's report, including report title, address, body of report, name of firm, and audit report date.

Answer 1

Independent Auditor's Report
To the shareholders of EPM, Inc.
We have audited the accompanying balance sheets of EPM, Inc., as of December 31, 2012 and 2011, and the related statements of income, retained earnings, and cash flows for the years 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 conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of EPM, Inc., as of December 31, 2012 and 2011, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles.
As discussed in Note 4 to the financial statements, EPM, Inc., changed its method of computing depreciation.
Harrington and Perry, LLP
March 5, 2013

Question 2

Describe the standard unqualified report to be issued for an audit of a private company. Begin by specifying the seven parts of the report, and then discuss the contents of each part.

Answer 2

The parts of the standard unqualified report are as follows:
• Report title. The title must include the word "independent." Examples of appropriate titles are "independent auditor's report," or "report of independent accountant."
• Report address. The report is usually addressed to the company's stockholders or board of directors. It should not be addressed to company management.
• Introductory paragraph. There are three important components of the introductory paragraph. First, it states that an audit was performed. Second, it lists the financial statements that were audited and their dates. Third, it states that management is responsible for the financial statements, and that the auditor is responsible for expressing an opinion on those statements based on an audit.
• Scope paragraph. The scope paragraph is a factual statement about what was done during the audit. It first states that auditing standards generally accepted in the United States of America were followed by the auditor. It then states that an audit is designed to obtain reasonable assurance about whether the statements are free of material misstatement. It concludes by stating that the auditor evaluated the appropriateness of the accounting principles used, and estimates made, by management, and of the financial statement disclosures and presentations given.
• Opinion paragraph. This paragraph states the auditor's opinion concerning whether the financial statements present fairly the client's financial position and results of its operations and cash flows in conformity with generally accepted accounting principles.
• Name of CPA firm. Typically, the name of the CPA firm, and not the name of an individual auditor, is used.
• Audit report date. The audit report is normally dated as of the last day of fieldwork.

Question 3

The scope paragraph of the standard unqualified audit report states that the audit is designed to:

A) discover all errors and/or irregularities.
B) discover material errors and/or irregularities.
C) conform to generally accepted accounting principles.
D) obtain reasonable assurance whether the statements are free of material misstatement.

Answer 3

D

Question 4

The introductory paragraph of the standard audit report states that the auditor is:

A) responsible for the financial statements and the opinion on them.
B) responsible for the financial statements.
C) responsible for the opinion on the financial statements.
D) jointly responsible for the financial statements with management.

Question 5

Which of the following statements are true?
I) The introductory paragraph states that management is responsible for the preparation and content of the financial statements.
II) The scope paragraph states that the auditor evaluates the appropriateness of those accounting principles, estimates, and financial statement disclosures.

A) I only
B) II only
C) I and II
D) Neither I nor II

Question 6

Most auditors believe that financial statements are "presented fairly" when the statements are in accordance with GAAP, and that it is also necessary to:

A) determine that they are not in violation of FASB statements.
B) examine the substance of transactions and balances for possible misinformation.
C) review the statements using the accounting principles promulgated by the SEC.
D) assure investors that net income reported this year will be exceeded in the future.

Question 7

An audit report prepared by Garrett and Brown, CPAs, is provided below. The audit for the year ended December 31, 2012 was completed on March 1, 2013, and the report was issued to Javlin Corporation, a private company, on March 13, 2013. List any deficiencies in this report. Do not rewrite the report.
We have examined the accompanying financial statements of Dalton Corporation as of December 31, 2012. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these statements based on our audit.
We conducted our audit in accordance with generally accepted accounting principles. Those principles require that we plan and perform the audit to provide reasonable assurance about whether the financial statements are free of misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, except for the effects of not capitalizing certain lease obligations that should be capitalized in order to conform with generally accepted accounting principles, the financial statements referred to above present accurately the financial position of Jacob Corporation as of December 31, 2012, in conformity with accounting principles generally accepted in the United States of America.
Garrett and Brown, CPAs
March, 2013

Question 8

The introductory paragraph of the standard audit report for a non-profit company performs which functions?
I) States the CPA has performed an audit.
II) Lists the financials being audited.
III) States the financials are the responsibility of the auditor.

A) I and II
B) I and III
C) II and III
D) I, II and III

Question 9

The audit report date on a standard unqualified report indicates:

A) the last day of the fiscal period.
B) the date on which the financial statements were filed with the Securities and Exchange Commission.
C) the last date on which users may institute a lawsuit against either client or auditor.
D) the last day of the auditor's responsibility for the review of significant events that occurred subsequent to the date of the financial statements.

Question 10

The standard audit report refers to GAAS and GAAP in which paragraphs?

A)
B)
C)
D)

Question 11

If the balance sheet of a company is dated December 31, 2011, the audit report is dated February 8, 2012, and both are released on February 15, 2012, this indicates that the auditor has searched for subsequent events that occurred up to:

A) December 31, 2011.
B) January 1, 2012.
C) February 8, 2012.
D) February 15, 2012.

Question 12

Auditing standards require that the audit report must be titled and that the title must:

A) include the word "independent."
B) indicate if the auditor is a CPA.
C) indicate if the auditor is a proprietorship, partnership, or incorporated.
D) indicate the type of audit opinion issued.

Question 13

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

Question 14

The financial statements most commonly audited by external auditors are the balance sheet, the income statement, and the statement of changes in retained earnings.

Question 15

Which of the following is not explicitly stated in the standard unqualified audit report?

A) The financial statements are the responsibility of management.
B) The audit was conducted in accordance with generally accepted accounting principles.
C) The auditors believe that the audit provides a reasonable basis for their opinion.
D) An audit includes assessing the accounting estimates used.

Question 16

The appropriate audit report date for a standard nonqualitifed audit report for a non-public entity should be the:

A) date the financial statements are given to the Board of Directors.
B) date of the financial statements.
C) date the auditor completed the auditing procedures in the field.
D) 60 days after the date of the financial statements as required by the SEC.

Question 17

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

A)
B)
C)
D)

Question 18

If an auditor performs an audit of a public company, the scope paragraph should make reference to which standards?

A) GAAP.
B) GAAS.
C) Standards issued by the PCAOB (U.S.).
D) International Audit Standards.

Question 19

The introductory paragraph of the standard audit report states that the financial statements are:

A) the responsibility of the auditor.
B) the responsibility of management.
C) the joint responsibility of management and the auditor.
D) none of the above.

Question 20

An audit of historical financial statements most commonly includes the:

A) balance sheet, statement of retained earnings, and the statement of cash flows.
B) income statement, the statement of cash flows, and the statement of net working capital.
C) statement of cash flows, balance sheet, and the statement of retained earnings.
D) balance sheet, income statement, and the statement of cash flows.

Question 21

There are four conditions that must be met before an auditor can issue a standard unqualified report for the audit of a private company. Please discuss each of these four conditions.

Question 22

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

Question 23

The phrase "auditing standards generally accepted in the United States of America" can be found in the opinion paragraph of a standard, unqualified audit report for a public company.

Question 24

Examples of unqualified opinions which contain modified wording (without adding an explanatory paragraph) include:

A) the use of other auditors.
B) material uncertainties.
C) substantial doubt about the audited company (or the entity) continuing as a going concern.
D) lack of consistent application of GAAP.

Question 25

Audit reports issued for financial statements of a private company should refer to generally accepted auditing standards in the scope paragraph.

Question 26

Auditing standards for public companies are established by the:

A) SEC.
B) FASB.
C) PCAOB.
D) IRS.

Question 27

The standard unqualified audit report for public entities includes the following three paragraphs:

A) introductory, scope and management's responsibility.
B) materiality, scope and report.
C) introductory, scope and opinion.
D) scope, fieldwork and conclusion.

Question 28

The audit report is normally addressed to the company's president or chief executive officer.

Question 29

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

Question 30

Whenever an auditor issues an audit report for a public company, the auditor can choose to issue a report in which of the following forms?
I) A combined report on financial statements and internal control over financial reporting.
II) Separate reports on financial statements and internal control over financial reporting.

A) I only
B) II only
C) Either I or II.
D) Neither I nor II.

Question 31

In which of the following situations would the auditor most likely issue an unqualified report?

A) The client valued ending inventory by using the replacement cost method.
B) The client valued ending inventory by using the Next-In-First-Out (NIFO) method.
C) The client valued ending inventory at selling price rather than historical cost.
D) The client valued ending inventory by using the First-In-First-Out (FIFO) method, but showed the replacement cost of inventory in the Notes to the Financial Statements.

Question 32

The standard unqualified audit report:

A) is sometimes called a clean opinion.
B) can be issued only with an explanatory paragraph.
C) can be issued if only a balance sheet and income statement are included in the financial statements.
D) is sometimes called a disclaimer report.

Question 33

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

Question 34

The date of the auditor's report is indicative of the last day of the auditor's responsibility for the review of significant events occurring after the balance sheet date.

Question 35

Auditors of public company financial statements must issue separate reports on internal control over financial reporting.

Question 36

The audit report date is the date the auditor completed audit procedures in the field.

Question 37

Audit reports issued for financial statements of a public company should refer to generally accepted auditing standards in the scope paragraph.

Question 38

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:

A) included in the scope paragraph.
B) included in the opinion paragraph.
C) included in a separate paragraph in the report.
D) included in the introductory paragraph.

Question 39

The phrase "The audit is designed to obtain reasonable assurance about whether the statements are free of material misstatements" is included in the introductory paragraph of an audit report.

Question 40

Section 404(b) of the Sarbanes Oxley Act requires that the auditor of an issuer attest to management's report on the efficiency of internal controls over financial reporting.

Question 41

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

A)
B)
C)
D)

Question 42

Under AICPA auditing standards, the primary auditor issuing the opinion on the financial statements is called the:

A) component auditor.
B) principal auditor.
C) group engagement partner.
D) majority auditor.

Question 43

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.

A) I only
B) II only
C) I or II
D) Neither I nor II

Question 44

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

A) The existence of material related party transactions.
B) The lack of auditor independence.
C) Important events occurring subsequent to the balance sheet date.
D) Material uncertainties disclosed in the footnotes.

Question 45

Which of the following modifications of the auditor's report does not include an explanatory paragraph?

A) A qualified report due to a GAAP departure.
B) The report includes an emphasis of a matter.
C) There is a very material scope limitation.
D) A principle auditor accepts the work of an other auditor.

Question 46

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

A)
B)
C)
D)

Question 47

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.

A) I and II
B) I and III
C) II and III
D) I, II and III

Question 48

Which of the following is false concerning the principal CPA firm's alternatives when issuing a report when another CPA firm performs part of the audit?

A) Issue a joint report signed by both CPA firms.
B) Make no reference to the other CPA firm in the audit report, and issue the standard unqualified opinion.
C) Make reference to the other auditor in the report by using modified wording (a shared opinion or report).
D) A qualified opinion or disclaimer, depending on materiality, is required if the principal auditor is not willing to assume any responsibility for the work of the other auditor.

Question 49

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

A) management refused to allow the auditor to confirm significant accounts receivable for which there were no alternative procedures performed.
B) Mmnagement decided not to allow the auditor to confirm significant accounts receivable, but the auditor obtained sufficient appropriate evidence by examining subsequent cash receipts.
C) part of the audit was performed by other auditors whose report was furnished to the principle auditor.
D) management has determined that fixed assets should be reported in the balance sheet at their replacement values rather than historical costs. The auditors do not concur.

Question 50

When there is uncertainty about a company's ability to continue as a going concern, the auditor's concern is the possibility that the client may not be able to continue its operations or meet its obligations for a "reasonable period of time." For this purpose, a reasonable period of time is considered not to exceed:

A) six months from the date of the financial statements.
B) one year from the date of the financial statements.
C) six months from the date of the audit report.
D) one year from the date of the audit report.

Question 51

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

A)
B)
C)
D)

Question 52

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

A)
B)
C)
D)

Question 53

The term "explanatory paragraph" was replaced in the AICPA auditing standards with:

A) going concern paragraph.
B) emphasis-of-matter paragraph.
C) departure from principles paragraph.
D) consistency paragraph.

Question 54

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:

A) must not refer to the examination of the other auditor.
B) must refer to the examination of the other auditor.
C) may refer to the examination of the other auditor.
D) must refer to the examination of the other auditors along with the percentage off consolidated assets and revenue that they audited.

Question 55

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.

Question 56

Which of the following requires recognition in the auditor's opinion as to consistency?

A) The correction of an error in the prior year's financial statements resulting from a mathematical mistake in capitalizing interest.
B) A change in the estimate of provisions for warranty costs.
C) The change from the cost method to the equity method of accounting for investments in common stock.
D) A change in depreciation method which has no effect on current year's financial statements but is certain to affect future years.

Question 57

When a company's financial statements contain a departure from GAAP with which the auditor concurs, the departure should be explained in:

A) the scope paragraph.
B) an explanatory paragraph that appears before the opinion paragraph.
C) the opinion paragraph.
D) an explanatory paragraph after the opinion paragraph.

Question 58

A company has changed its method of inventory valuation from an unacceptable one to one in conformity with generally accepted accounting principles. The auditor's report on the financial statements of the year of the change should include:

A) no reference to consistency.
B) a reference to a prior period adjustment in the opinion paragraph.
C) an explanatory paragraph that justifies the change and explains the impact of the change on reported net income.
D) an explanatory paragraph explaining the change.

Question 59

When an auditor is trying to determine how changes can affect consistency and/or compatibility, he should keep in mind that:

A) changes that affect comparability but not consistency require an explanatory paragraph.
B) items that materially affect the comparability of financial statements requires a disclaimer of opinion.
C) changes that affect consistency require an explanatory paragraph if they are material.
D) changes that involved comparability or consistency only need to be mentioned in the footnotes.

Question 60

Which of the following is least likely to cause uncertainty about the ability of an entity to continue as a going concern?

A) The entity is suing a competitor for a minor patent infringement.
B) The entity has lost a major customer.
C) The entity has significant recurring operating losses.
D) The entity has working capital deficiencies.

Question 61

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

A) if the client requests it.
B) only if it is highly material.
C) only if it is material but not pervasive.
D) in all cases.

Question 62

Items that materially affect the comparability of the financial statements generally require disclosure in the footnotes.

Question 63

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

A) The auditor lacks independence.
B) A client-imposed scope limitation.
C) A circumstance imposed scope limitation.
D) Lack of full disclosure within the footnotes.

Question 64

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.

Question 65

Changes in an estimate, such as a change in the estimated useful life of an asset for depreciation purposes, affect consistency but not comparability, and therefore require an explanatory paragraph in the audit report.

Question 66

An auditor can express a qualified opinion due to a:

A)
B)
C)
D)

Question 67

Items that materially affect the comparability of financial statements generally require disclosure in the footnotes. If the client refuses to properly disclose the item, the auditor will most likely issue:

A) a disclaimer.
B) an unqualified opinion.
C) a qualified opinion.
D) an adverse opinion.

Question 68

A modified unqualified auditor report arises when the auditor believes the financials are fairly stated but also believes additional information should be provided.

Question 69

The only modified unqualified opinion that does not include an explanatory paragraph is when other auditors are involved. In this case only the introductory paragraph is modified.

Question 70

A qualified opinion can be issued for which of the following?
I) When a limitation on the scope of the audit has occurred.
II) When the auditor lacks independence.
III) When generally accepted accounting principles have not been used.

A) I and II
B) I and III
C) II and III
D) I, II and III

Question 71

Changes of an accounting estimate requires the auditor to issue a modified unqualified audit report with a consistency paragraph is inserted after the opinion paragraph.

Question 72

If the phrase "except for" is present in the opinion paragraph of the audit report, the auditor has issued a(n):

A) adverse opinion.
B) disclaimer opinion.
C) unqualified opinion.
D) qualified opinion.

Question 73

As a result of management's refusal to permit the auditor to physically examine inventory. The auditor must depart from the unqualified audit report because:

A) the financial statements have not been prepared in accordance with GAAP.
B) the scope of the audit has been restricted by circumstances beyond either the client's or auditor's control.
C) the financial statements have not been audited in accordance with GAAS.
D) the scope of the audit has been restricted.

Question 74

An adverse opinion is issued when the auditor believes:

A) some parts of the financial statements are materially misstated or misleading. d the financial statements would be found to be materially misstated if an investigation were performed.
B) the financial statements would be found to be materially misstated if an investigation were performed.
C) the auditor is not independent.
D) the overall financial statements are so materially misstated that they do not present fairly the financial position or results of operations and cash flows in conformity with GAAP.

Question 75

A client has changed their method of valuing inventory from FIFO to LIFO and the change has a material effect on the financial statements. If the auditor does not concur with the appropriateness of the change, the auditor should issue a(n):

A) disclaimer.
B) adverse opinion.
C) unqualified opinion.
D) qualified opinion.

Question 76

An auditor determines the financial statements include at least a material departure from GAAP. Which type of opinion may be issued?

A)
B)
C)
D)

Question 77

When an auditor relies upon a different CPA firm to perform part of the audit and chooses to issue a shared opinion, only the auditor's responsibility paragraph should be modified.

Question 78

In certain circumstances, an auditor will issue modified unqualified report. Discuss each of the five circumstances when an auditor would issue an unqualified report with an explanatory paragraph or modified wording.

Question 79

Changes in reporting entities, such as the inclusion of an additional company in combined financial statements, affect comparability but not consistency, and therefore do not require an explanatory paragraph in the audit report.

Question 80

When the auditor determines the financial statements are fairly stated and then determines that the auditor lacks independence, the auditor should issue:

A) an adverse opinion.
B) a disclaimer of opinion.
C) either a qualified opinion or an adverse opinion.
D) either a qualified opinion or an unqualified opinion with modified wording.