Deck 4: Reports on Audited Financial Statements

Question 1

Which level of assurance is provided by a public accountant as a result of an audit?

A)Complete assurance.
B)Moderate assurance.
C)Negative assurance.
D)Reasonable assurance.

Answer 1

D

Question 2

A PA,having given consent to a client to include reviewed financial statements and the related review report in a loan application,becomes aware that an error was made in the reproduced statements.What are the PA's responsibilities in such a case?

A)To contact all users of the information to advise them of the error.
B)The auditor has no responsibility related to the erroneous information,because no audit was performed on the information.
C)To ensure the client signs a waiver exonerating the PA from any responsibility for loss or damage arising from the use of the financial statements.
D)To advise the client of the error.

Answer 2

D

Question 3

Which of the following statements concerning the auditor's responsibility paragraph of the audit report is false?

A)An explanation is made of the scope of the auditor's work.
B)It is presented after the "responsibilities of management and those charged with governance" paragraph.
C)Reference can be made to an appendix or website where additional descriptions of auditor responsibilities are described.
D)It is presented before the opinion paragraph.

Answer 3

D

Question 4

CPA has been engaged to audit the financial statements of Marchano Ltd. ,a manufacturer of toys.Several individuals are suing the company because of a toy that injured children.The company has not disclosed the lawsuit in its financial statements.What type of audit report should be issued?

A)Adverse.
B)A GAAP qualification.
C)A scope qualification.
D)Disclaimer or denial

Question 5

In which of the following circumstances is an auditor most likely to express a disclaimer of opinion?

A)The chief executive officer refuses the auditor access to minutes of board of directors' meetings.
B)Tests of controls show that the entity's internal control system is so poor that it cannot be relied upon.
C)The financial statements are not in accordance with the CPA Canada Handbook regarding the capitalization of leases.
D)Information comes to the auditor's attention that raises substantial doubt about the entity's ability to continue as a going concern.

Question 6

Which level of assurance results in a public accountant (PA)expressing a conclusion in the negative form "nothing has come to my attention"?

A)Audit.
B)Review.
C)Examination.
D)Compilation.

Question 7

An auditor will issue an adverse opinion when ________.

A)a severe scope limitation has been imposed by the client
B)a violation of GAAP is sufficiently material that a qualified opinion is not justified
C)a qualified opinion cannot be rendered because the auditor lacks independence
D)the company's ability to continue as a going concern is subject to substantial doubt

Question 8

"The company has not made an allowance for bad debts for an account deemed uncollectible in the amount of $250,000 as of the year ended December 31,2016." is an example of a ________.

A)GAAP change requiring a qualified opinion
B)scope limitation
C)departure from GAAP
D)report with a disclaimer of opinion

Question 9

Without the public accountant's knowledge or consent,the enterprise indicates that the public accountant (PA)was involved with information issued by the enterprise.Which of the following statements is true?

A)The PA has no responsibilities with respect to the information.
B)The PA should issue an opinion on the information.
C)The PA is not associated with the information.
D)The PA is associated with the information.

Question 10

When associated with information,the PA's professional responsibilities include all but which of the following?

A)Applicable standards in the CPA Canada Handbook must be met
B)A certainty level of assurance obtained that the information is accurate.
C)Ensuring appropriate communication of the extent of the PA's involvement with the information
D)Compliance with the appropriate rules of professional conduct

Question 11

In which of the following circumstances is a public accountant (PA)considered associated with a company's financial information?

A)The PA is a former employee of the company and prepared the statements.
B)Financial statements are reproduced on the PA's letterhead.
C)The PA is engaged by the company's auditors to do limited procedures in a remote location.
D)The PA is married to the company's Chief Financial Officer.

Question 12

In which of the following situations would an auditor ordinarily choose between expressing an "except for" qualified opinion or an adverse opinion?

A)The auditor did not observe the entity's physical inventory and is unable to become satisfied as to its balance by other auditing procedures.
B)The financial statements fail to disclose information that is required by generally accepted accounting principles.
C)The auditor is asked to report only on the entity's balance sheet and not on the other basic financial statements.
D)Events disclosed in the financial statements cause the auditor to have substantial doubt about the entity's ability to continue as a going concern.

Question 13

Under which of the following circumstances does an accountant not become associated with a financial report?

A)The accountant sits on the board of directors of the enterprise that issues the report.
B)In all cases in which the accountant consents to the use of his or her name in the report.
C)The enterprise indicates that the accountant audited or reviewed the information included in the report.
D)The report states that the accountant prepared or performed other services with respect to the information.

Question 14

A holding company has decided to carry its wholly owned subsidiary companies on the balance sheet using the equity method.The type of audit report required is ________.

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

Question 15

An audit report included an additional paragraph disclosing a difference of opinion between the auditor and the client.The auditor believed that an adjustment should be made to the financial statements.What should the opinion paragraph of the audit report express?

A)An unqualified opinion.
B)An "except for" opinion citing a departure from generally accepted accounting principles.
C)An "except for" opinion citing a scope limitation.
D)A disclaimer of opinion.

Question 16

If financial statements contain a very material departure from GAAP such that the financial statements are virtually useless,the auditor can render a(an)________.

A)qualified "except for" opinion with reference to the departure
B)adverse opinion with scope limitation reference
C)adverse opinion with reference to the departure
D)disclaimer of opinion

Question 17

Upon completing the audit of ABC Company Ltd. ,the auditor has concluded that the financial statements are fairly presented and there is material uncertainty as to the ability of the company to continue as a going concern.Consequently,what type of audit opinion should be issued?

A)An adverse audit opinion.
B)An unqualified opinion report with an emphasis of matter paragraph added.
C)A qualified opinion due to GAAP departure.
D)A standard unmodified audit report with the inclusion of the going concern issue as a key audit matter.

Question 18

Levels of assurance refer to ________.

A)the amount of credibility provided by accountants and auditors
B)generally accepted auditing standards
C)qualifications,modifications,and expansions
D)changes in the language of the audit report

Question 19

Restrictions imposed by a client prohibited the observation of physical inventories that account for 35% of total assets.Alternative audit procedures for inventory were not feasible,although the auditor was able to obtain satisfactory evidence for all other items in the financial statements.The auditor should express ________.

A)an "except for" qualified opinion referring to a departure from generally accepted accounting principles
B)a disclaimer of opinion
C)an unqualified opinion with a separate explanatory paragraph
D)an unqualified opinion with an explanation in the scope paragraph

Question 20

What is the best description of the basis on which an auditor issues his or her report on financial statements?

A)Reporting standards.
B)Sufficiency and appropriateness of evidence.
C)Application of GAAP.
D)Integrity of management.

Question 21

An auditor who is reporting on financial statements that contain a material departure from generally accepted accounting principles should include a separate explanatory paragraph and ________.

A)express a qualified or adverse opinion
B)not modify the opinion paragraph as long as the departure is adequately disclosed in a footnote
C)deny an opinion on the financial statements
D)express a qualified opinion or deny an opinion

Question 22

A disclaimer of opinion generally indicates ________.

A)the auditor is very uncertain with respect to an item (or multiple items)and cannot form an opinion on the fairness of presentation of the financial statements as a whole
B)because of a lack of evidence,the auditor is uncertain with respect to an isolated item that is material but not so material that the auditor cannot form an opinion on the fairness of presentation of the financial statements as a whole
C)the auditor has observed a departure from generally accepted accounting principles that has a material effect upon the fairness of presentation of financial statements,but the departure is not material enough to justify a qualified opinion
D)the auditor has observed a departure from generally accepted accounting principles that is so material that a qualified opinion is not justified

Question 23

When a client will not permit inquiry of outside legal counsel,the audit report will ordinarily contain a(n)________.

A)disclaimer of opinion
B)"except for" qualified opinion regarding a departure from generally accepted accounting principles
C)unqualified opinion with a separate explanatory paragraph
D)adverse opinion

Question 24

For which of the following situations would the auditor issue an unqualified audit opinion with an emphasis of matter paragraph?

A)The client,a government defense contractor,refuses the auditor access to certain material fixed asset additions due to the confidentiality issues.The auditor is able to perform alternative audit procedures to gain reasonable assurance about the existence of these assets.
B)The client's opening balance sheet figures were unaudited.
C)The client has been named as the defendant in a lawsuit,the outcome of which may result in a highly material judgement against the client.The lawsuit is properly disclosed in the notes to the financial statement.
D)There is material uncertainty as to the ability of the client to continue as a going concern.The client does not agree to a note disclosure,but agrees to have the issue mentioned in the audit report.

Question 25

Auditors cannot give negative assurance in an audit report.

Question 26

Management has decided that the life of a piece of heavy equipment should be decreased from 15 years to 10 years,thus increasing the annual amortization.The auditor agrees that this amortization period is more reflective of the nature of the asset.The type of audit report that should be issued is ________.

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

Question 27

Auditing standards require that an appropriate communication be issued in all cases where an accountant's name is associated with financial information.

Question 28

An auditor was unable to physically count the inventory at year-end due to a flood arising from a hurricane.The inventory represents over 80% of the current assets and 60% of the total assets on the balance sheet.In addition,while completing other audit procedures,the auditor determines that a material investment reported using the cost method should instead be reported using the equity method.How should the audit report by these two circumstances?

A)The auditor must resign from the engagement to avoid association with false or misleading information.
B)A qualified opinion should be issued,indicating both a scope restriction and a GAAP departure.The basis for disclaimer paragraph should explain both that the inventory could not be counted and that the impact of the investment not being presented using the equity method.
C)A disclaimer of opinion should be issued: the basis for disclaimer paragraph should explain that inventory could not be counted and also explain the impact of the investment not being presented using the equity method.
D)An adverse audit opinion should be issued,with the inventory and investment issues explained in the basis for adverse opinion paragraph.

Question 29

In Canada,when there has been a change in accounting principles and the effect of the change has been properly disclosed,the auditor should ________.

A)refer to the change in an explanatory paragraph
B)explicitly concur that the change is preferred
C)issue an unqualified opinion
D)refer to the change in the opinion paragraph

Question 30

Association with a business enterprise's information can arise without the PA's knowledge or consent.

Question 31

Limited (moderate or negative)assurance is typical in the review report of audited financial statements.

Question 32

When an auditor concludes there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time,the auditor's responsibility is to ________.

A)prepare prospective financial information to verify whether management's plans can be effectively implemented
B)project future conditions and events for a period of time not to exceed one year following the date of the financial statements
C)issue a qualified or adverse opinion,depending upon materiality,due to the possible effects on the financial statements
D)consider the adequacy of disclosure about the entity's possible inability to continue as a going concern and draw attention to the issue in the audit report.

Question 33

An accountant becomes associated with financial statements when he or she signs them as the Chief Financial Officer.

Question 34

In which of the following circumstances may the auditor issue the standard unqualified,unmodified audit report?

A)The client disclosed a change in accounting principles with an immaterial effect on financial position and results of operations.
B)The financial statements do not disclose significant going concern issues.
C)The financial statements do not disclose a justified departure from generally accepted accounting principles.
D)The auditor has not been able to audit a substantial portion of the balance sheet because of circumstances beyond anyone's control.

Question 35

Green,CPA,was engaged to audit the financial statements of Essex Corporation after its fiscal year had ended.The timing of Green's appointment as auditor and the start of field work made confirmation of accounts receivable by direct communication with the debtors impracticable.Green applied other procedures and was satisfied as to the reasonableness of the account balances.Green's auditor's report most likely contained a(n)________.

A)unqualified opinion with standard wording
B)unqualified opinion with an explanatory paragraph
C)qualified opinion due to a scope limitation
D)qualified opinion due to a departure from generally accepted auditing standards

Question 36

An auditor most likely would issue a disclaimer of opinion because of ________.

A)inadequate disclosure of a material contingent liability.
B)the omission of the statement of cash flows
C)a material asset addition should have been expensed.
D)management's refusal to furnish written representations

Question 37

An independent auditor must consider whether the auditee has the ability to continue as a going concern.If a substantial doubt exists but disclosure is adequate and no other basis exists for modifying the report,the auditor should ________.

A)disclaim an opinion.
B)express an adverse opinion.
C)qualify the opinion.
D)express an unqualified opinion.

Question 38

Under which of the following circumstances would a disclaimer of opinion not be appropriate?

A)The client refuses to allow the auditor to review the minutes of the board of director's meetings.
B)The client refused to provide a signed management representation letter.
C)The auditor is engaged after the year-end and is unable to observe ending physical inventories,which are highly material.
D)The auditor has identified illegal payments to foreign officials made by the client's management.

Question 39

An auditor decided to issue a qualified opinion on an entity's financial statements because a major inadequacy in its computerized accounting records prevented the auditor from applying necessary procedures.The opinion paragraph of the auditor's report should state that the qualification pertains to ________.

A)a GAAP departure
B)a departure from generally accepted auditing standards
C)the possible effect of the lack of audit evidence on the financial statements
D)inadequate disclosure of necessary information

Question 40

A clean opinion does not imply that the financial statement disclosures are reasonably adequate.

Question 41

In the standard unmodified audit report,an auditor provides a "clean" audit opinion on the entire financial statements,including all of the footnote disclosures

Question 42

You are auditing the financial statements of a public traded company that sells a product that is subject to high degree of market volatility.As a result,there is significant uncertainty as to the proper valuation of the inventory at year-end,which could result in highly material fluctuations in its carrying value.Management's estimates as to the selling price,while deemed appropriate,are difficult to verify and make inventory valuation a high risk area of the audit.
How does the above matter would impact on your reporting requirements for this audit engagement?

Question 43

An auditor concludes that an outstanding lawsuit against the client is significant enough that it warrants drawing the users attention to it in the audit report.Assuming the lawsuit is fairly disclosed,no mention of it is made in the standard opinion sentence.

Question 44

What are the public accountant's responsibilities when he or she is associated with the financial information of a company?

Question 45

The words "except for" should be used in the opinion paragraph only if there is a reservation resulting in a disclaimer of opinion or a scope qualification.

Question 46

A scope limitation imposed by a client affecting the audit in a material,but not pervasive way,would result in a disclaimer of opinion.

Question 47

Due to securities commission requirements,audit report reservations due to GAAP departures are rare.

Question 48

What are the three ways that accountants become associated with financial information issued by an enterprise?

Question 49

An organization undergoing significant going concern problems presents several challenges for the public accountant (PA)to consider.Discuss some of these.

Question 50

When there is material uncertainty about an auditee's ability to continue as a going concern,and the issue has been fully disclosed in the notes to the financial statements,the auditor should issue a qualified report with a paragraph drawing attention to the going concern issue.

Question 51

When an adverse opinion is given,all the substantive reasons for the opinion must be disclosed in the report the basis of modification explanatory paragraphs.

Question 52

Why must a CPA issue a report when associated with financial information?