Chapter 17 - Auditors' Reports

Chapter 17
Auditors' Reports

True / False Questions

1. Audit reports should be dated the date on which the financial statements are issued.
True False

2. When the auditors are unable to compl with !enerall accepted auditin! standards" the
should issue an opinion that is un#ualified" but include an additional e$planator para!raph in
the report.
True False

%. When e&aluatin! the results of audit tests" materialit depends upon both the dollar amount
and the nature of the item.
True False

'. A public compan's financial statements should be prepared followin! standards of the
(ublic Compan Accountin! )&ersi!ht *oard.
True False

+. ,f financial statements fail to disclose a material fact" the auditors ma disclose the
information in an e$planator para!raph and issue an un#ualified opinion on the statements.
True False

-. ,f financial statements contain a material departure from !enerall accepted accountin!
principles" the auditors usuall should not issue an un#ualified opinion.
True False

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Chapter 17 - Auditors' Reports
7. A .&er material. chan!e from one !enerall accepted accountin! principle to another
!enerall accepted accountin! principle usuall results in an ad&erse opinion b the auditors.
True False

/. When there is a si!nificant #uestion about a compan's abilit to remain a !oin! concern"
the report issued is usuall un#ualified with an e$planator para!raph.
True False

0. A client imposed scope limitation will !enerall result in a disclaimer of opinion.
True False

11. Re!ulation 2-3 !o&erns the form and content of financial statements filed with the 24C.
True False


Multiple Choice Questions

11. Which of the followin! is not e$plicitl included in an audit report for a nonpublic
compan5
A. A statement that he auditor belie&es that his or her audit pro&ides a reasonable basis for
e$pressin! ne!ati&e assurance.
*. A statement that the auditor's responsibilit is to e$press an opinion on the financial
statements.
C. A statement that the financial statements in the report are the responsibilit of
mana!ement.
6. A title with the word .independent..

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Chapter 17 - Auditors' Reports
12. When an auditor has concluded there is substantial doubt about an entit's abilit to
continue as a !oin! concern for a reasonable period of time beond the current financial
statement date 79/30/X18" the auditor's responsibilit includes9
A. (reparin! prospecti&e financial information to &erif whether mana!ement's plans can be
effecti&el implemented.
*. (ro:ectin! conditions and e&ents from one ear prior to this ear's date 79/30/X08 to
9/30/X1.
C. ,ssuin! an ad&erse or ne!ati&e assurance opinion" dependin! upon materialit" due to the
possible effects on the financial statements.
6. Considerin! the ade#uac of disclosure about the entit's possible inabilit to continue as a
!oin! concern.

1%. When the auditor of a nonpublic compan issues an ad&erse opinion an e$planator
para!raph is added. ,n addition" which" if an" para!raphs to the report are modified5

A. )ption A
*. )ption *
C. )ption C
6. )ption 6

1'. When an auditor issues a #ualified report on financial statements due to a scope limitation
an e$planator para!raph is added. ,n addition" which" if an" para!raphs to the report are
modified5

A. )ption A
*. )ption *
C. )ption C
6. )ption 6

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Chapter 17 - Auditors' Reports
1+. When an auditor issues an un#ualified report on financial statements" but adds an
emphasis of a matter para!raph to the report" which" if an" para!raphs to the report are
modified5

A. )ption A
*. )ption *
C. )ption C
6. )ption 6

1-. An e$planator para!raph relatin! to a scope limitation in the audit of the financial
statements of a nonpublic compan should be placed
A. After the opinion para!raph.
*. (rior to the opinion para!raph.
C. 4ither before or after the opinion para!raph.
6. An audit report modified for a scope limitation does not include an e$planator para!raph.

17. After considerin! an entit's ne!ati&e trends and financial difficulties" an auditor has
substantial doubt about the entit's abilit to continue as a !oin! concern. The auditor's
considerations relatin! to mana!ement's plans for dealin! with the ad&erse effects of these
conditions most li;el would include mana!ement's plans to9
A. ,ncrease current di&idend distributions.
*. Reduce e$istin! lines of credit.
C. ,ncrease ownership e#uit.
6. (urchase assets formerl leased.

1/. When an auditor of financial statements does not confirm material accounts recei&able"
but is satisfied b the application of alternati&e auditin! procedures" she normall should9
A. ,ssue an un#ualified opinion" but disclose elsewhere in the report this departure from a
customar procedure.
*. ,ssue an un#ualified opinion with no reference to this omission but be prepared to defend
the action.
C. ,ssue a #ualified opinion or a disclaimer" dependin! on the materialit of the recei&ables.
6. ,ssue an ad&erse opinion.

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Chapter 17 - Auditors' Reports
10. When an auditor of financial statements has substantial doubt about an entit's abilit to
continue as a !oin! concern because of the probable discontinuance of operations" the auditor
most li;el would e$press a #ualified opinion if
A. The effects of the ad&erse financial conditions li;el will cause a ban;ruptc filin!.
*. ,nformation about the entit's abilit to continue as a !oin! concern is not disclosed.
C. <ana!ement has no plans to reduce or dela future e$penditures.
6. =e!ati&e trends and recurrin! operatin! losses appear to be irre&ersible.

21. An auditor of financial statements belie&es that there is substantial doubt about an entit's
abilit to continue as a !oin! concern for a reasonable period of time. ,n e&aluatin! the
entit's plans for dealin! with the ad&erse effects of future conditions and e&ents" the auditor
most li;el would consider" as a miti!atin! factor" the entit's plans to
A. Repurchase the entit's stoc; at a price below its boo; &alue.
*. ,ssue stoc; options to ;e e$ecuti&es.
C. >ease rather than purchase operatin! facilities.
6. Accelerate the due date of an e$istin! mort!a!e.

21. Which of the followin! procedures most li;el would assist an auditor in identifin!
conditions and e&ents that ma indicate substantial doubt about an entit's abilit to continue
as a !oin! concern5
A. (erformin! cutoff tests of sales transactions with customers with lon!-standin! recei&able
balances.
*. 4&aluatin! the entit's procedures for identifin! and recordin! related part transactions.
C. ,nspectin! title documents to &erif whether an real propert is pled!ed as collateral.
6. ,n#uirin! of the entit's le!al counsel about liti!ation" claims" and assessments.

22. When a client declines to disclose essential information in the financial statements or
notes" the auditor of the financial statements should9
A. (ro&ide the information in the audit report" if practicable" and #ualif the opinion because
of a limitation on the scope of the audit.
*. (ro&ide the information in the audit report" if practicable" and #ualif the opinion because
of a departure from ?AA(.
C. ,ssue a disclaimer of opinion because the client has interfered with the auditor's function of
assessin! the ade#uac of disclosure.
6. ,ssue an un#ualified opinion" but inform the reader b includin! the omitted information in
the audit report.

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Chapter 17 - Auditors' Reports
2%. C(A Firm A has performed most of the audit of Consolidated Compan's financial
statements and #ualifies as the principal auditor. C(A Firm * did the remainder of the wor;.
Firm A wishes to assume full responsibilit for Firm *'s wor;. Which of the followin!
statements is correct5
A. 2uch assumption of responsibilit &iolates the profession's standards.
*. ,n such circumstances" when appropriate re#uirements ha&e been met" Firm A should issue
a standard un#ualified opinion on the financial statements.
C. ,n such circumstances" when appropriate re#uirements ha&e been met" Firm A should issue
an un#ualified opinion on the financial statements but should ma;e appropriate reference to
Firm * in the audit report.
6. C(A firm A should normall #ualif its audit report on the basis of the scope limitation
in&ol&ed when another C(A firm is in&ol&ed.

2'. Which of the followin! is most accurate with respect to a C(A's responsibilit in
considerin! a !oin! concern #uestion on financial statement audits5
A. (erform analtical procedures aimed particularl at assessin! whether ban;ruptc is
probable.
*. ,ssue a report with a .!oin! concern. modification when failure is at least reasonabl
probable.
C. *ased on audit procedures performed" assess whether there is substantial doubt about the
entit's abilit to continue as a !oin! concern.
6. 6etermine that related uncertainties are properl disclosed and ma;e no mention in the
audit report.

2+. The Rotter Compan chan!ed accountin! principles in 213' from those followed in
213%. The auditor belie&es that the new principles are not in conformit with ?AA(" and
therefore that the 213' financial statements are misleadin!. The chan!e 7includin! its dollar
effect8 has been described in the notes to the 213' statements" which are bein! presented b
themsel&es. @nder these circumstances" in reportin! on the 213' financial statements" the
auditor should9
A. 4$press an ad&erse opinion with an e$planator para!raph disclosin! the reason 7the
accountin! chan!e8 for the opinion.
*. 4$press an un#ualified opinion with an e$planator para!raph and disclose the accountin!
chan!e from 213% and its effect on the financial statements.
C. 6isclaim an opinion and e$plain all of the reasons therefore.
6. 4$press an ad&erse opinion re!ardin! the 213' financial statements" without an
e$planator para!raph disclosin! the reason therefore since it will be included in the notes to
the statements.

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Chapter 17 - Auditors' Reports
2-. When financial statements are affected b a material departure from !enerall accepted
accountin! principles" the auditors should9
A. ,ssue an un#ualified report with an e$planator para!raph.
*. Withdraw from the en!a!ement.
C. ,ssue an .e$cept for. #ualification or an ad&erse opinion.
6. ,ssue an .e$cept for. #ualification or a disclaimer of opinion.

27. Which of the followin! accountin! chan!es re#uires e$planator lan!ua!e re!ardin!
consistenc in the auditors' report5
A. A chan!e in the estimated useful li&es of a class of fi$ed assets.
*. A write-off of a patent because future benefits do not appear to e$ist.
C. A chan!e from the strai!ht line method of depreciation to an accelerated method for a class
of fi$ed assets.
6. A chan!e in calculatin! bad debt e$pense from one percent to two percent of credit sales.

2/. The first para!raph of a standard un#ualified audit report for a nonpublic client is referred
to as the9
A. ,ntroductor para!raph.
*. 2cope para!raph.
C. )pinion para!raph.
6. 4$planator para!raph.

20. A scope restriction is least li;el to result in a7an89
A. Aualified opinion.
*. 6isclaimer of opinion.
C. Ad&erse opinion.
6. 2tandard un#ualified opinion.

%1. Which of the followin! is least li;el to result in e$planator lan!ua!e bein! added to an
un#ualified auditor's report on the financial statements of a client that sells :ewelr throu!h a
retail store5
A. A decision b the auditor to emphasiBe that the client is a part of a lar!er or!aniBation.
*. Reliance placed upon a specialist to e&aluate the diamonds.
C. A chan!e from F,F) to specific identification accountin! for in&entor.
6. A #uestion as to whether the client will be able to remain a !oin! concern.

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Chapter 17 - Auditors' Reports
%1. Which of the followin! statements is correct with respect to e$planator para!raphs in
reports on audits of the financial statements of nonpublic companies5
A. The alwas precede the opinion para!raph.
*. The alwas follow the opinion para!raph.
C. 2ometimes the precede and sometimes the follow the opinion para!raph.
6. The alwas precede the scope para!raph.

%2. A client has chan!ed the sal&a!e &alues of a number of its fi$ed assets. The auditors
belie&e that the sal&a!e &alues are realistic. The appropriate report on the financial statements
is9
A. 2tandard un#ualified.
*. @n#ualified with e$planator lan!ua!e as to consistenc.
C. Aualified for consistenc.
6. 6isclaimer.

%%. Which of the followin! would be most li;el to be an appropriate addressee for an audit
report5
A. The shareholders of the corporation whose financial statements were e$amined.
*. A third part who re#uested that a cop of the audit report be sent to her.
C. The president of the corporation whose financial statements were e$amined.
6. The chief financial officer.

%'. The term .e$cept for. in an audit report is9
A. @sed in an ad&erse opinion.
*. =o lon!er considered appropriate.
C. @sed in a #ualified opinion
6. @sed for an un#ualified opinion when an e$planator para!raph is added.

%+. The un#ualified standard audit report of a nonpublic compan does not e$plicitl state
that9
A. The financial statements are the responsibilit of the compan's mana!ement.
*. The audit was conducted in accordance with accountin! principles !enerall accepted in
the @nited 2tates of America.
C. The auditors belie&e that the audit pro&ides a reasonable basis for their opinion.
6. An audit includes assessin! the accountin! principles used.

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Chapter 17 - Auditors' Reports
%-. Which of the followin! is not a difference between the audit report of a nonpublic and
public compan5
A. The nonpublic compan report includes the word .Re!istered. in the title.
*. The nonpublic compan report refers to standards of the (CA)*.
C. The nonpublic compan report has an additional para!raph referrin! to the client's fraud
pre&ention procedures.
6. The nonpublic compan report must include the cit and state in which the report has been
issued.

%7. ,f audited financial statements include a balance sheet and an income statement" but do
not include a statement of cash flows9
A. The auditors ma still issue an un#ualified opinion.
*. The auditors should issue an .e$cept for. #ualification for the departure from !enerall
accepted accountin! principles.
C. The auditors should issue an opinion .sub:ect to. the information that would ha&e been
contained in the statement of cash flows.
6. The auditors should refuse to issue an opinion on onl the two financial statements.

%/. Which of the followin! circumstances !enerall results in the issuance of a report that is
other than un#ualified5
A. Circumstances ha&e si!nificantl limited the scope of the auditors' procedures.
*. The principal auditors for the en!a!ement are relin! on the wor; of other auditors.
C. The financial statements depart from a standard established b the FA2* because the
auditors ha&e concluded that application of the standard would result in materiall misleadin!
financial statements.
6. The auditors ha&e decided to emphasiBe the fact that the compan has en!a!ed in material
amounts of related part transactions.

%0. Which of the followin! modifications of the auditors' report does not include an additional
para!raph5
A. The report is #ualified because the financial statements contain a material departure from
!enerall accepted accountin! principles.
*. The report includes an emphasis of a matter.
C. The audit report indicates a di&ision of responsibilit between two C(A firms.
6. The report is #ualified because the scope of the auditors' wor; was restricted.

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Chapter 17 - Auditors' Reports
'1. ,f the predecessor auditors fail to reissue their audit report on comparati&e financial
statements the successor auditors should9
A. 4$press a #ualified opinion on the comparati&e financial statements audited b the
predecessor auditors.
*. Reproduce the predecessor auditors' report and include it with the new set of financial
statements.
C. Ca&e the client omit the comparati&e financial statements.
6. Refer to the report of the predecessor auditors.

'1. An audit client has refused to allow the auditors to perform a !enerall accepted auditin!
procedure. The circumstance would normall result in the issuance of9
A. A disclaimer of opinion.
*. An ad&erse opinion.
C. An .e$cept for. #ualification of the report.
6. An un#ualified report with e$planator lan!ua!e.

'2. Which of the followin! is a .re!istration statement. that is filed with the 24C b a
compan plannin! to issue securities to the public5
A. Form /-D.
*. Form 2-1.
C. Form 11-A.
6. Form 11-D.

'%. ,f principal auditors ma;e no reference to other auditors whose wor; the ha&e relied on
as a part of the basis for their report" the principal auditors9
A. Are not re#uired to in&esti!ate the professional reputation of the other auditors.
*. Are issuin! an inappropriate report.
C. Are assumin! full responsibilit for the wor; of the other auditors.
6. Are issuin! a #ualified opinion.

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Chapter 17 - Auditors' Reports
''. After performin! all necessar procedures the predecessor auditors reissue a prior-period
report on financial statements at the re#uest of the client without re&isin! the ori!inal
wordin!. The predecessor auditors should9
A. 6elete the date of the report.
*. 6ual-date the report.
C. @se the reissue date.
6. @se the date of the pre&ious report.

'+. When an ad&erse opinion is e$pressed" the opinion para!raph should include a direct
reference to9
A. A note to the financial statements which discusses the basis for the opinion.
*. The scope para!raph which discusses the basis for the opinion rendered.
C. A separate para!raph which discusses the basis for the opinion rendered.
6. The consistenc in the application of !enerall accepted accountin! principles.

'-. @nder which of the followin! set of circumstances mi!ht the auditors disclaim an
opinion5
A. The financial statements contain a departure from !enerall accepted accountin!
principles" the effect of which is material.
*. The principal auditors decide to ma;e reference to the report of another auditor who
audited a subsidiar.
C. There has been a material chan!e between periods in the method of application of
accountin! principles.
6. There are si!nificant scope limitations on the audit.

'7. The mana!ement of 2tanle Corporation has decided not to account for a material
transaction in accordance with the pro&isions of a recent statement of the FA2*. The ha&e
set forth their reasons in note .*. of the financial statements" which clearl demonstrates that
due to unusual circumstances the financial statements would otherwise ha&e been misleadin!.
The auditors' report on the financial statements will probabl contain a7an89
A. Aualified opinion and an e$planator para!raph with a reference to note .*..
*. @n#ualified opinion and an e$planator para!raph.
C. Ad&erse opinion and an e$planator para!raph.
6. .4$cept for. opinion and an e$planator para!raph.

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Chapter 17 - Auditors' Reports
'/. The auditors include e$planator lan!ua!e in an otherwise un#ualified report in order to
emphasiBe that the entit bein! reported upon is a subsidiar of another business enterprise.
The inclusion of this e$planator lan!ua!e9
A. ,s appropriate and would not ne!ate the un#ualified opinion.
*. ,s considered a #ualification of the report.
C. ,s a &iolation of !enerall accepted reportin! standards if this information is disclosed in
notes to the financial statements.
6. =ecessitates a re&ision of the opinion para!raph to include the phrase .with the fore!oin!
e$planation..

'0. ,t is not appropriate for the auditors' report to refer a reader to a financial statement note
for details re!ardin! a7an89
A. Chan!e in accountin! principle.
*. >imitation in the scope of the audit.
C. @ncertaint.
6. Related part transaction.

+1. Which of the followin! best describes the reference to the e$pression .ta;en as a whole.
in the fourth !enerall accepted auditin! standard of reportin!5
A. ,t applies e#uall to a complete set of financial statements and to each indi&idual financial
statement.
*. ,t applies onl to a complete set of financial statements.
C. ,t applies e#uall to each item in each financial statement.
6. ,t applies e#uall to each material item in each financial statement.

+1. Which of the followin! will not result in #ualification of the auditors' report due to a
scope limitation5
A. Restrictions imposed b the client.
*. Reliance placed upon the report of other auditors.
C. ,nabilit to obtain sufficient competent e&idential matter.
6. ,nade#uac in the accountin! records.

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Chapter 17 - Auditors' Reports
+2. For a continuin! audit client" when a complete set of financial statements is presented on a
comparati&e basis for two ears" the auditors' opinion would refer to9
A. )nl the current ear under audit.
*. 4ither one or both ears at the option of the auditors.
C. 4ach of the two ears plus the precedin! ear.
6. 4ach of the ears in the two-ear period.

+%. Which of the followin! representations does an auditor ma;e e$plicitl and which
implicitl when issuin! an un#ualified opinion on public compan financial statements5

A. )ption A
*. )ption *
C. )ption C
6. )ption 6

+'. For a particular entit's financial statements to be presented fairl in conformit with
!enerall accepted accountin! principles" it is not re#uired that the principles selected9
A. *e appropriate in the circumstances for the particular entit.
*. Reflect transactions in a manner that presents the financial statements within a ran!e of
acceptable limits.
C. (resent information in the financial statements that is classified and summariBed in a
reasonable manner.
6. *e applied on a basis consistent with those followed in the prior ear.

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Chapter 17 - Auditors' Reports
++. ,n which of the followin! circumstances would an ad&erse opinion be appropriate5
A. The auditor is not independent with respect to the enterprise bein! audited.
*. The statements are not in conformit with !enerall accepted accountin! principles
because the omit a statement of chan!es in financial position.
C. The statements are not in conformit with !enerall accepted accountin! principles
re!ardin! pension plans.
6. A client-imposed scope limitation pre&ents the auditor from complin! with !enerall
accepted auditin! standards.

+-. An independent auditor has concluded that a substantial doubt remains about a client's
abilit to continue as a !oin! concern" but the client's financial statements ha&e properl
disclosed all of its sol&enc problems. The auditor would probabl issue a7an89
A. @n#ualified opinion with an appropriate e$planator para!raph.
*. .4$cept for. #ualified opinion.
C. 2tandard un#ualified opinion.
6. Ad&erse opinion.

+7. A limitation on the scope of the audit sufficient to preclude an un#ualified opinion will
alwas result when mana!ement9
A. As;s the auditor to report on the balance sheet and not on the other basic financial
statements.
*. Refuses to permit its lawer to respond to the letter of audit in#uir.
C. 6iscloses material related part transactions in the notes to the financial statements.
6. Dnows that confirmation of accounts recei&able is not feasible.

+/. 6oe" an independent auditor" was en!a!ed to perform an audit of the financial statements
of All ,ncorporated one month after its fiscal ear had ended. Althou!h the in&entor count
was not obser&ed b 6oe" and accounts recei&able were not confirmed b direct
communication with debtors" 6oe was able to !ain satisfaction b applin! alternati&e
auditin! procedures. 6oe's audit report will probabl contain9
A. A standard un#ualified opinion.
*. An un#ualified opinion and an e$planator para!raph.
C. 4ither a #ualified opinion or a disclaimer of opinion.
6. An .e$cept for. #ualification.

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Chapter 17 - Auditors' Reports
+0. The fourth reportin! standard re#uires the auditor's report to contain either an e$pression
of opinion re!ardin! the financial statements" ta;en as a whole" or an assertion to the effect
that an opinion cannot be e$pressed. The ob:ecti&e of the fourth standard is to pre&ent9
A. The C(A from reportin! on one basic financial statement and not the others.
*. <isinterpretations re!ardin! the de!ree of responsibilit that the auditor is assumin!.
C. The C(A from e$pressin! different opinions on each of the basic financial statements.
6. <ana!ement from reducin! its final responsibilit for the basic financial statements.

-1. The principal auditor is satisfied with the independence and professional reputation of the
other auditor who has audited a subsidiar. To indicate the di&ision of responsibilit" the
principal auditor should modif9
A. The introductor" scope" and opinion para!raphs of the report.
*. )nl the scope para!raph of the report.
C. )nl the opinion para!raph of the report.
6. )nl the opinion para!raph of the report and include an e$planator para!raph.

-1. <or!an" C(A" is the principal auditor for a multinational corporation. Another C(A has
e$amined and reported on the financial statements of a si!nificant subsidiar of the
corporation. <or!an is satisfied with the independence and professional reputation of the
other auditor" as well as the #ualit of the other auditor's audit. With respect to <or!an's
report on the consolidated financial statements" ta;en as a whole" <or!an9
A. <ust not refer to the audit of the other C(A.
*. <ust refer to the audit of the other C(A.
C. <a refer to the audit of the other C(A.
6. <a refer to the audit of the other C(A" in which case <or!an must include in the audit
report on the consolidated financial statements a #ualified opinion with respect to the audit of
the other C(A.

-2. When reportin! on comparati&e financial statements where the financial statements of the
prior period ha&e been e$amined b a predecessor auditor whose report is not presented" the
successor auditor should indicate in the report9
A. The reasons wh the predecessor auditor's report is not presented.
*. The identit of the predecessor auditor who e$amined the financial statements of the prior
ear.
C. Whether the predecessor auditor's re&iew of the current ear's financial statements re&ealed
an matter that mi!ht ha&e a material effect on the successor auditor's opinion.
6. The tpe of opinion e$pressed b the predecessor auditor.

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Chapter 17 - Auditors' Reports
-%. ,f an accountin! chan!e has no material effect on the financial statements in the current
ear" but the chan!e is reasonabl certain to ha&e a material effect in later ears" the chan!e
should be9
A. Referred to in the auditor's report for the current ear.
*. 6isclosed in the notes to the financial statements of the current ear.
C. 6isclosed in the notes to the financial statements and referred to in the auditor's report for
the current ear.
6. Treated as a subse#uent e&ent.

-'. When financial statements of a prior period are presented on a comparati&e basis with
financial statements of the current period" the continuin! auditor is responsible for9
A. 4$pressin! dual dated opinions.
*. @pdatin! the report on the pre&ious financial statements onl if there has not been a chan!e
in the opinion.
C. @pdatin! the report on the pre&ious financial statements onl if the pre&ious report was
#ualified and the reasons for the #ualification no lon!er e$ist.
6. @pdatin! the report on the pre&ious financial statements re!ardless of the opinion
pre&iousl issued.

-+. An auditor has been as;ed to report on the balance sheet of Dane Compan but not on the
other basic financial statements. The auditor will ha&e access to all information underlin! the
basic financial statements. @nder these circumstances" the auditor9
A. <a accept the en!a!ement because such en!a!ements merel in&ol&e limited reportin!
ob:ecti&es.
*. <a accept the en!a!ement but should disclaim an opinion because of an inabilit to appl
the procedures considered necessar.
C. 2hould refuse the en!a!ement because there is a client-imposed scope limitation.
6. 2hould refuse the en!a!ement because of a departure from !enerall accepted auditin!
standards.

--. When the auditor is unable to determine the amounts associated with the ille!al acts of
client personnel because of an inabilit to obtain ade#uate e&idence" the auditor should issue
a7an89
A. .2ub:ect to. #ualified opinion.
*. 6isclaimer of opinion.
C. Ad&erse opinion.
6. @n#ualified opinion with a separate e$planator para!raph.

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Chapter 17 - Auditors' Reports
-7. ,f the principal auditor decides to ma;e reference to the other auditor's audit" the
introductor para!raph must specificall indicate the9
A. <a!nitude of the portion of the financial statements e$amined b the other auditor.
*. =ame of the other auditor.
C. =ame of the consolidated subsidiar e$amined b the other auditor.
6. Tpe of opinion e$pressed b the other auditor.

-/. Which of the followin! will result in e$planator lan!ua!e as to consistenc in the
auditor's report" re!ardless of whether the item is full disclosed in the financial statements5
A. A chan!e in accountin! estimate.
*. A chan!e from an unacceptable accountin! principle to a !enerall accepted one.
C. Correction of an error not in&ol&in! a chan!e in accountin! principle.
6. A chan!e in classification.

-0. An auditor's report on comparati&e financial statements should be dated as of the date of
the9
A. ,ssuance of the report.
*. Accumulation of sufficient appropriate audit e&idence.
C. >atest financial statements bein! reported on.
6. >ast related-part transaction disclosed in the statements.

71. ,n which of the followin! circumstances would an auditor of financial statements be most
li;el to e$press an ad&erse opinion5
A. The statements are not in conformit with the FA2* 2tatements re!ardin! the
capitaliBation of leases.
*. ,nformation comes to the auditor's attention that raises substantial doubt about the entit's
abilit to continue in e$istence.
C. The chief e$ecuti&e officer refuses the auditor access to minutes of board of directors'
meetin!s.
6. Tests of controls show that the entit's internal control is so poor that it can not be relied
upon.


17-17
Chapter 17 - Auditors' Reports
Essay Questions

71. William E (laud are principle auditors for the >owell Corporation. )ne of the subsidiaries
of >owell Corporation" Wilson <anufacturin! Co." is audited b >le E Adams.
a. ,f William E (laud ma;e reference in their report to reliance on the report of other auditors
are the #ualifin! their opinion5 4$plain.
b. Re!ardless of whether William E (laud ma;e reference to reliance on the report of the
other auditors" the should perform certain procedures with respect to >le and Adams' audit.
What are these procedures5




72. @pon completin! an audit" the auditors should issue an opinion on the client's financial
statements.
a. >ist the conditions that permit the issuance of an un#ualified opinion on the financial
statements.
b. 6escribe three situations in which the auditors ma modif their standard report and still
issue an un#ualified opinion.




17-1/
Chapter 17 - Auditors' Reports
7%. ,dentif the deficiencies 7includin! both incorrect statements and omissions8 contained in
the auditors' report on a nonpublic compan as drafted below. Fou will recei&e credit for those
ou properl identif" and lose credit for those ou identif which aren't actuall deficiencies.
Auditors' Report
To the *oard of 6irectors and <ana!ement
3FG Compan
We ha&e re&iewed the consolidated balance sheet of 3FG Compan as of 6ecember %1"
2133" and the related statements of income" retained earnin!s" and cash flows for the ear
then ended. )ur responsibilit is to e$press an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with !enerall accepted accountin! standards. Those
standards re#uire that we plan and perform the audit to obtain absolute assurance about
whether the financial statements are free of material misstatement. An audit includes
e$aminin!" on a test basis" e&idence supportin! the amounts and disclosures in the financial
statements. An audit also includes assessin! the accountin! principles used and si!nificant
estimates made b mana!ement" as well as e&aluatin! the o&erall financial statement
presentation. We belie&e that our audit pro&ides a reasonable basis for our opinion.
,n our opinion" the financial statements referred to abo&e present the financial position of
3FG Compan as of 6ecember %1" 2133" and the results of operations and its cash flows for
the ear then ended in conformit with auditin! standards !enerall accepted in the @nited
2tates of America applied on a consistent basis with the precedin! ear.
Art Foun!ster E Co.
Certified (ublic Accountants
(hoeni$" AriBona
6ecember %1" 2133




17-10
Chapter 17 - Auditors' Reports
7'. @se the accompanin! solution sheet to repl to all of the situations below that relate to
the audit of financial statements of nonpublic companies. @nless indicated otherwise" assume
that material amounts are in&ol&ed.

A compan has departed from ?AA( for what the auditor considers to be un:ustified reasons.

A compan's in&entor records were deficient and the auditor was re#uired to satisf herself
that the in&entor was properl stated usin! alternati&e procedures. 2he is satisfied with the
results of those procedures.

,n auditin! a client" an auditor has determined that substantial doubt e$ists about an entit's
abilit to continue as a !oin! concern.

A principal auditor decides not to ta;e responsibilit for the wor; of another C(A who audited
a 71H owned subsidiar and issued an un#ualified opinion. The total assets and re&enues of
the subsidiar are +H and /H" respecti&el" of the total assets and re&enues of the entit bein!
audited.

A compan chan!es from F,F) to >,F) for in&entor &aluation and the auditor concurs with
the chan!e. The chan!e has a material effect on the comparabilit of the entit's financial
statements this ear" but is e$pected to ha&e an immaterial effect in the future.

A client is issuin! two ears of comparati&e financial statements. The first ear was audited
b another auditor who" after performin! the appropriate procedures" has updated and reissued
her audit report. 7=)T49 Fou are replin! as to the proper report to be issued at the end of the
second ear.8I%J

A compan has included incorrect other information in a client prepared document containin!
audited statements. The financial statements are correct" but the president's letter is incorrect.

A client has chan!ed its estimate of li;el doubtful accounts from 2H of credit sales to %H.
The auditor belie&es the chan!e to be reasonable.I2J

17-21
Chapter 17 - Auditors' Reports
Repl as to the followin! three factors relatin! to the appropriate audit report7s8 for each of
the situations. <ore than one tpe of opinion and placement of e$planator para!raph repl
ma be appropriate.
Circumstances--)ther auditors" !oin! concern" consistenc" emphasis of a matter" :ustified
departure from ?AA(" un:ustified departure from ?AA(" 2cope >imitation 71 of these must
be selected e$cept for numbers - and 78.
Tpes of )pinion
A. 2tandard un#ualified
*. @n#ualified with an e$planator para!raph
C. @n#ualified with e$planator lan!ua!e" but no e$planator para!raph.
6. Aualified
4. 6isclaimer
F. Ad&erse
,f more than one tpe of opinion is appropriate list each.
(lacement of e$planator para!raph--before opinion para!raph" after opinion para!raph"
either before or after the opinion para!raph" not applicable since there is no e$planator
para!raph. 7,f more than one tpe of opinion was appropriate" pro&ide a separate repl for
placement of e$planator para!raph for each.8





17-21
Chapter 17 - Auditors' Reports
Chapter 17 Auditors' Reports Answer De


True / False Questions

1. Audit reports should be dated the date on which the financial statements are issued.
FALE

Difficulty: Easy

2. When the auditors are unable to compl with !enerall accepted auditin! standards" the
should issue an opinion that is un#ualified" but include an additional e$planator para!raph in
the report.
FALE

Difficulty: Medium

%. When e&aluatin! the results of audit tests" materialit depends upon both the dollar amount
and the nature of the item.
TR!E

Difficulty: Easy

'. A public compan's financial statements should be prepared followin! standards of the
(ublic Compan Accountin! )&ersi!ht *oard.
FALE

Difficulty: Hard

17-22
Chapter 17 - Auditors' Reports
+. ,f financial statements fail to disclose a material fact" the auditors ma disclose the
information in an e$planator para!raph and issue an un#ualified opinion on the statements.
FALE

Difficulty: Medium

-. ,f financial statements contain a material departure from !enerall accepted accountin!
principles" the auditors usuall should not issue an un#ualified opinion.
TR!E

Difficulty: Easy

7. A .&er material. chan!e from one !enerall accepted accountin! principle to another
!enerall accepted accountin! principle usuall results in an ad&erse opinion b the auditors.
FALE

Difficulty: Medium

/. When there is a si!nificant #uestion about a compan's abilit to remain a !oin! concern"
the report issued is usuall un#ualified with an e$planator para!raph.
TR!E

Difficulty: Medium

0. A client imposed scope limitation will !enerall result in a disclaimer of opinion.
TR!E

Difficulty: Medium

11. Re!ulation 2-3 !o&erns the form and content of financial statements filed with the 24C.
TR!E

Difficulty: Easy

17-2%
Chapter 17 - Auditors' Reports

Multiple Choice Questions

11. Which of the followin! is not e$plicitl included in an audit report for a nonpublic
compan5
A" A statement that he auditor belie&es that his or her audit pro&ides a reasonable basis for
e$pressin! ne!ati&e assurance.
*. A statement that the auditor's responsibilit is to e$press an opinion on the financial
statements.
C. A statement that the financial statements in the report are the responsibilit of
mana!ement.
6. A title with the word .independent..

Difficulty: Easy

12. When an auditor has concluded there is substantial doubt about an entit's abilit to
continue as a !oin! concern for a reasonable period of time beond the current financial
statement date 79/30/X18" the auditor's responsibilit includes9
A. (reparin! prospecti&e financial information to &erif whether mana!ement's plans can be
effecti&el implemented.
*. (ro:ectin! conditions and e&ents from one ear prior to this ear's date 79/30/X08 to
9/30/X1.
C. ,ssuin! an ad&erse or ne!ati&e assurance opinion" dependin! upon materialit" due to the
possible effects on the financial statements.
#" Considerin! the ade#uac of disclosure about the entit's possible inabilit to continue as a
!oin! concern.

Difficulty: Medium

17-2'
Chapter 17 - Auditors' Reports
1%. When the auditor of a nonpublic compan issues an ad&erse opinion an e$planator
para!raph is added. ,n addition" which" if an" para!raphs to the report are modified5

A. )ption A
*. )ption *
C" )ption C
6. )ption 6

Difficulty: Medium

1'. When an auditor issues a #ualified report on financial statements due to a scope limitation
an e$planator para!raph is added. ,n addition" which" if an" para!raphs to the report are
modified5

A. )ption A
*. )ption *
C" )ption C
6. )ption 6

Difficulty: Medium

17-2+
Chapter 17 - Auditors' Reports
1+. When an auditor issues an un#ualified report on financial statements" but adds an
emphasis of a matter para!raph to the report" which" if an" para!raphs to the report are
modified5

A. )ption A
*. )ption *
C. )ption C
#" )ption 6

Difficulty: Medium

1-. An e$planator para!raph relatin! to a scope limitation in the audit of the financial
statements of a nonpublic compan should be placed
A. After the opinion para!raph.
$" (rior to the opinion para!raph.
C. 4ither before or after the opinion para!raph.
6. An audit report modified for a scope limitation does not include an e$planator para!raph.

Difficulty: Easy

17. After considerin! an entit's ne!ati&e trends and financial difficulties" an auditor has
substantial doubt about the entit's abilit to continue as a !oin! concern. The auditor's
considerations relatin! to mana!ement's plans for dealin! with the ad&erse effects of these
conditions most li;el would include mana!ement's plans to9
A. ,ncrease current di&idend distributions.
*. Reduce e$istin! lines of credit.
C" ,ncrease ownership e#uit.
6. (urchase assets formerl leased.

Difficulty: Medium
Source: AICA

17-2-
Chapter 17 - Auditors' Reports
1/. When an auditor of financial statements does not confirm material accounts recei&able"
but is satisfied b the application of alternati&e auditin! procedures" she normall should9
A. ,ssue an un#ualified opinion" but disclose elsewhere in the report this departure from a
customar procedure.
$" ,ssue an un#ualified opinion with no reference to this omission but be prepared to defend
the action.
C. ,ssue a #ualified opinion or a disclaimer" dependin! on the materialit of the recei&ables.
6. ,ssue an ad&erse opinion.

Difficulty: Medium

10. When an auditor of financial statements has substantial doubt about an entit's abilit to
continue as a !oin! concern because of the probable discontinuance of operations" the auditor
most li;el would e$press a #ualified opinion if
A. The effects of the ad&erse financial conditions li;el will cause a ban;ruptc filin!.
$" ,nformation about the entit's abilit to continue as a !oin! concern is not disclosed.
C. <ana!ement has no plans to reduce or dela future e$penditures.
6. =e!ati&e trends and recurrin! operatin! losses appear to be irre&ersible.

Difficulty: Medium
Source: AICA

21. An auditor of financial statements belie&es that there is substantial doubt about an entit's
abilit to continue as a !oin! concern for a reasonable period of time. ,n e&aluatin! the
entit's plans for dealin! with the ad&erse effects of future conditions and e&ents" the auditor
most li;el would consider" as a miti!atin! factor" the entit's plans to
A. Repurchase the entit's stoc; at a price below its boo; &alue.
*. ,ssue stoc; options to ;e e$ecuti&es.
C" >ease rather than purchase operatin! facilities.
6. Accelerate the due date of an e$istin! mort!a!e.

Difficulty: Medium
Source: AICA

17-27
Chapter 17 - Auditors' Reports
21. Which of the followin! procedures most li;el would assist an auditor in identifin!
conditions and e&ents that ma indicate substantial doubt about an entit's abilit to continue
as a !oin! concern5
A. (erformin! cutoff tests of sales transactions with customers with lon!-standin! recei&able
balances.
*. 4&aluatin! the entit's procedures for identifin! and recordin! related part transactions.
C. ,nspectin! title documents to &erif whether an real propert is pled!ed as collateral.
#" ,n#uirin! of the entit's le!al counsel about liti!ation" claims" and assessments.

Difficulty: Easy
Source: AICA

22. When a client declines to disclose essential information in the financial statements or
notes" the auditor of the financial statements should9
A. (ro&ide the information in the audit report" if practicable" and #ualif the opinion because
of a limitation on the scope of the audit.
$" (ro&ide the information in the audit report" if practicable" and #ualif the opinion because
of a departure from ?AA(.
C. ,ssue a disclaimer of opinion because the client has interfered with the auditor's function of
assessin! the ade#uac of disclosure.
6. ,ssue an un#ualified opinion" but inform the reader b includin! the omitted information in
the audit report.

Difficulty: Medium

2%. C(A Firm A has performed most of the audit of Consolidated Compan's financial
statements and #ualifies as the principal auditor. C(A Firm * did the remainder of the wor;.
Firm A wishes to assume full responsibilit for Firm *'s wor;. Which of the followin!
statements is correct5
A. 2uch assumption of responsibilit &iolates the profession's standards.
$" ,n such circumstances" when appropriate re#uirements ha&e been met" Firm A should issue
a standard un#ualified opinion on the financial statements.
C. ,n such circumstances" when appropriate re#uirements ha&e been met" Firm A should issue
an un#ualified opinion on the financial statements but should ma;e appropriate reference to
Firm * in the audit report.
6. C(A firm A should normall #ualif its audit report on the basis of the scope limitation
in&ol&ed when another C(A firm is in&ol&ed.

Difficulty: Medium

17-2/
Chapter 17 - Auditors' Reports
2'. Which of the followin! is most accurate with respect to a C(A's responsibilit in
considerin! a !oin! concern #uestion on financial statement audits5
A. (erform analtical procedures aimed particularl at assessin! whether ban;ruptc is
probable.
*. ,ssue a report with a .!oin! concern. modification when failure is at least reasonabl
probable.
C" *ased on audit procedures performed" assess whether there is substantial doubt about the
entit's abilit to continue as a !oin! concern.
6. 6etermine that related uncertainties are properl disclosed and ma;e no mention in the
audit report.

Difficulty: Medium

2+. The Rotter Compan chan!ed accountin! principles in 213' from those followed in
213%. The auditor belie&es that the new principles are not in conformit with ?AA(" and
therefore that the 213' financial statements are misleadin!. The chan!e 7includin! its dollar
effect8 has been described in the notes to the 213' statements" which are bein! presented b
themsel&es. @nder these circumstances" in reportin! on the 213' financial statements" the
auditor should9
A" 4$press an ad&erse opinion with an e$planator para!raph disclosin! the reason 7the
accountin! chan!e8 for the opinion.
*. 4$press an un#ualified opinion with an e$planator para!raph and disclose the accountin!
chan!e from 213% and its effect on the financial statements.
C. 6isclaim an opinion and e$plain all of the reasons therefore.
6. 4$press an ad&erse opinion re!ardin! the 213' financial statements" without an
e$planator para!raph disclosin! the reason therefore since it will be included in the notes to
the statements.

Difficulty: Hard

2-. When financial statements are affected b a material departure from !enerall accepted
accountin! principles" the auditors should9
A. ,ssue an un#ualified report with an e$planator para!raph.
*. Withdraw from the en!a!ement.
C" ,ssue an .e$cept for. #ualification or an ad&erse opinion.
6. ,ssue an .e$cept for. #ualification or a disclaimer of opinion.

Difficulty: Medium

17-20
Chapter 17 - Auditors' Reports
27. Which of the followin! accountin! chan!es re#uires e$planator lan!ua!e re!ardin!
consistenc in the auditors' report5
A. A chan!e in the estimated useful li&es of a class of fi$ed assets.
*. A write-off of a patent because future benefits do not appear to e$ist.
C" A chan!e from the strai!ht line method of depreciation to an accelerated method for a class
of fi$ed assets.
6. A chan!e in calculatin! bad debt e$pense from one percent to two percent of credit sales.

Difficulty: Medium

2/. The first para!raph of a standard un#ualified audit report for a nonpublic client is referred
to as the9
A" ,ntroductor para!raph.
*. 2cope para!raph.
C. )pinion para!raph.
6. 4$planator para!raph.

Difficulty: Easy

20. A scope restriction is least li;el to result in a7an89
A. Aualified opinion.
*. 6isclaimer of opinion.
C" Ad&erse opinion.
6. 2tandard un#ualified opinion.

Difficulty: Medium

%1. Which of the followin! is least li;el to result in e$planator lan!ua!e bein! added to an
un#ualified auditor's report on the financial statements of a client that sells :ewelr throu!h a
retail store5
A. A decision b the auditor to emphasiBe that the client is a part of a lar!er or!aniBation.
$" Reliance placed upon a specialist to e&aluate the diamonds.
C. A chan!e from F,F) to specific identification accountin! for in&entor.
6. A #uestion as to whether the client will be able to remain a !oin! concern.

Difficulty: Hard

17-%1
Chapter 17 - Auditors' Reports
%1. Which of the followin! statements is correct with respect to e$planator para!raphs in
reports on audits of the financial statements of nonpublic companies5
A. The alwas precede the opinion para!raph.
*. The alwas follow the opinion para!raph.
C" 2ometimes the precede and sometimes the follow the opinion para!raph.
6. The alwas precede the scope para!raph.

Difficulty: Easy

%2. A client has chan!ed the sal&a!e &alues of a number of its fi$ed assets. The auditors
belie&e that the sal&a!e &alues are realistic. The appropriate report on the financial statements
is9
A" 2tandard un#ualified.
*. @n#ualified with e$planator lan!ua!e as to consistenc.
C. Aualified for consistenc.
6. 6isclaimer.

Difficulty: Hard

%%. Which of the followin! would be most li;el to be an appropriate addressee for an audit
report5
A" The shareholders of the corporation whose financial statements were e$amined.
*. A third part who re#uested that a cop of the audit report be sent to her.
C. The president of the corporation whose financial statements were e$amined.
6. The chief financial officer.

Difficulty: Easy

%'. The term .e$cept for. in an audit report is9
A. @sed in an ad&erse opinion.
*. =o lon!er considered appropriate.
C" @sed in a #ualified opinion
6. @sed for an un#ualified opinion when an e$planator para!raph is added.

Difficulty: Easy

17-%1
Chapter 17 - Auditors' Reports
%+. The un#ualified standard audit report of a nonpublic compan does not e$plicitl state
that9
A. The financial statements are the responsibilit of the compan's mana!ement.
$" The audit was conducted in accordance with accountin! principles !enerall accepted in
the @nited 2tates of America.
C. The auditors belie&e that the audit pro&ides a reasonable basis for their opinion.
6. An audit includes assessin! the accountin! principles used.

Difficulty: Hard

%-. Which of the followin! is not a difference between the audit report of a nonpublic and
public compan5
A. The nonpublic compan report includes the word .Re!istered. in the title.
*. The nonpublic compan report refers to standards of the (CA)*.
C" The nonpublic compan report has an additional para!raph referrin! to the client's fraud
pre&ention procedures.
6. The nonpublic compan report must include the cit and state in which the report has been
issued.

Difficulty: Medium

%7. ,f audited financial statements include a balance sheet and an income statement" but do
not include a statement of cash flows9
A. The auditors ma still issue an un#ualified opinion.
$" The auditors should issue an .e$cept for. #ualification for the departure from !enerall
accepted accountin! principles.
C. The auditors should issue an opinion .sub:ect to. the information that would ha&e been
contained in the statement of cash flows.
6. The auditors should refuse to issue an opinion on onl the two financial statements.

Difficulty: Medium

17-%2
Chapter 17 - Auditors' Reports
%/. Which of the followin! circumstances !enerall results in the issuance of a report that is
other than un#ualified5
A" Circumstances ha&e si!nificantl limited the scope of the auditors' procedures.
*. The principal auditors for the en!a!ement are relin! on the wor; of other auditors.
C. The financial statements depart from a standard established b the FA2* because the
auditors ha&e concluded that application of the standard would result in materiall misleadin!
financial statements.
6. The auditors ha&e decided to emphasiBe the fact that the compan has en!a!ed in material
amounts of related part transactions.

Difficulty: Medium

%0. Which of the followin! modifications of the auditors' report does not include an additional
para!raph5
A. The report is #ualified because the financial statements contain a material departure from
!enerall accepted accountin! principles.
*. The report includes an emphasis of a matter.
C" The audit report indicates a di&ision of responsibilit between two C(A firms.
6. The report is #ualified because the scope of the auditors' wor; was restricted.

Difficulty: Medium

'1. ,f the predecessor auditors fail to reissue their audit report on comparati&e financial
statements the successor auditors should9
A. 4$press a #ualified opinion on the comparati&e financial statements audited b the
predecessor auditors.
*. Reproduce the predecessor auditors' report and include it with the new set of financial
statements.
C. Ca&e the client omit the comparati&e financial statements.
#" Refer to the report of the predecessor auditors.

Difficulty: Hard

17-%%
Chapter 17 - Auditors' Reports
'1. An audit client has refused to allow the auditors to perform a !enerall accepted auditin!
procedure. The circumstance would normall result in the issuance of9
A" A disclaimer of opinion.
*. An ad&erse opinion.
C. An .e$cept for. #ualification of the report.
6. An un#ualified report with e$planator lan!ua!e.

Difficulty: Medium

'2. Which of the followin! is a .re!istration statement. that is filed with the 24C b a
compan plannin! to issue securities to the public5
A. Form /-D.
$" Form 2-1.
C. Form 11-A.
6. Form 11-D.

Difficulty: Easy

'%. ,f principal auditors ma;e no reference to other auditors whose wor; the ha&e relied on
as a part of the basis for their report" the principal auditors9
A. Are not re#uired to in&esti!ate the professional reputation of the other auditors.
*. Are issuin! an inappropriate report.
C" Are assumin! full responsibilit for the wor; of the other auditors.
6. Are issuin! a #ualified opinion.

Difficulty: Medium

''. After performin! all necessar procedures the predecessor auditors reissue a prior-period
report on financial statements at the re#uest of the client without re&isin! the ori!inal
wordin!. The predecessor auditors should9
A. 6elete the date of the report.
*. 6ual-date the report.
C. @se the reissue date.
#" @se the date of the pre&ious report.

Difficulty: Hard
Source: AICA

17-%'
Chapter 17 - Auditors' Reports
'+. When an ad&erse opinion is e$pressed" the opinion para!raph should include a direct
reference to9
A. A note to the financial statements which discusses the basis for the opinion.
*. The scope para!raph which discusses the basis for the opinion rendered.
C" A separate para!raph which discusses the basis for the opinion rendered.
6. The consistenc in the application of !enerall accepted accountin! principles.

Difficulty: Medium
Source: AICA

'-. @nder which of the followin! set of circumstances mi!ht the auditors disclaim an
opinion5
A. The financial statements contain a departure from !enerall accepted accountin!
principles" the effect of which is material.
*. The principal auditors decide to ma;e reference to the report of another auditor who
audited a subsidiar.
C. There has been a material chan!e between periods in the method of application of
accountin! principles.
#" There are si!nificant scope limitations on the audit.

Difficulty: Medium
Source: AICA

'7. The mana!ement of 2tanle Corporation has decided not to account for a material
transaction in accordance with the pro&isions of a recent statement of the FA2*. The ha&e
set forth their reasons in note .*. of the financial statements" which clearl demonstrates that
due to unusual circumstances the financial statements would otherwise ha&e been misleadin!.
The auditors' report on the financial statements will probabl contain a7an89
A. Aualified opinion and an e$planator para!raph with a reference to note .*..
$" @n#ualified opinion and an e$planator para!raph.
C. Ad&erse opinion and an e$planator para!raph.
6. .4$cept for. opinion and an e$planator para!raph.

Difficulty: Hard
Source: AICA

17-%+
Chapter 17 - Auditors' Reports
'/. The auditors include e$planator lan!ua!e in an otherwise un#ualified report in order to
emphasiBe that the entit bein! reported upon is a subsidiar of another business enterprise.
The inclusion of this e$planator lan!ua!e9
A" ,s appropriate and would not ne!ate the un#ualified opinion.
*. ,s considered a #ualification of the report.
C. ,s a &iolation of !enerall accepted reportin! standards if this information is disclosed in
notes to the financial statements.
6. =ecessitates a re&ision of the opinion para!raph to include the phrase .with the fore!oin!
e$planation..

Difficulty: Medium
Source: AICA

'0. ,t is not appropriate for the auditors' report to refer a reader to a financial statement note
for details re!ardin! a7an89
A. Chan!e in accountin! principle.
$" >imitation in the scope of the audit.
C. @ncertaint.
6. Related part transaction.

Difficulty: Medium
Source: AICA

+1. Which of the followin! best describes the reference to the e$pression .ta;en as a whole.
in the fourth !enerall accepted auditin! standard of reportin!5
A" ,t applies e#uall to a complete set of financial statements and to each indi&idual financial
statement.
*. ,t applies onl to a complete set of financial statements.
C. ,t applies e#uall to each item in each financial statement.
6. ,t applies e#uall to each material item in each financial statement.

Difficulty: Hard
Source: AICA

17-%-
Chapter 17 - Auditors' Reports
+1. Which of the followin! will not result in #ualification of the auditors' report due to a
scope limitation5
A. Restrictions imposed b the client.
$" Reliance placed upon the report of other auditors.
C. ,nabilit to obtain sufficient competent e&idential matter.
6. ,nade#uac in the accountin! records.

Difficulty: Hard
Source: AICA

+2. For a continuin! audit client" when a complete set of financial statements is presented on a
comparati&e basis for two ears" the auditors' opinion would refer to9
A. )nl the current ear under audit.
*. 4ither one or both ears at the option of the auditors.
C. 4ach of the two ears plus the precedin! ear.
#" 4ach of the ears in the two-ear period.

Difficulty: Medium
Source: AICA

+%. Which of the followin! representations does an auditor ma;e e$plicitl and which
implicitl when issuin! an un#ualified opinion on public compan financial statements5

A. )ption A
*. )ption *
C. )ption C
#" )ption 6

Difficulty: Medium

17-%7
Chapter 17 - Auditors' Reports
+'. For a particular entit's financial statements to be presented fairl in conformit with
!enerall accepted accountin! principles" it is not re#uired that the principles selected9
A. *e appropriate in the circumstances for the particular entit.
*. Reflect transactions in a manner that presents the financial statements within a ran!e of
acceptable limits.
C. (resent information in the financial statements that is classified and summariBed in a
reasonable manner.
#" *e applied on a basis consistent with those followed in the prior ear.

Difficulty: Medium
Source: AICA

++. ,n which of the followin! circumstances would an ad&erse opinion be appropriate5
A. The auditor is not independent with respect to the enterprise bein! audited.
*. The statements are not in conformit with !enerall accepted accountin! principles
because the omit a statement of chan!es in financial position.
C" The statements are not in conformit with !enerall accepted accountin! principles
re!ardin! pension plans.
6. A client-imposed scope limitation pre&ents the auditor from complin! with !enerall
accepted auditin! standards.

Difficulty: Medium
Source: AICA

+-. An independent auditor has concluded that a substantial doubt remains about a client's
abilit to continue as a !oin! concern" but the client's financial statements ha&e properl
disclosed all of its sol&enc problems. The auditor would probabl issue a7an89
A" @n#ualified opinion with an appropriate e$planator para!raph.
*. .4$cept for. #ualified opinion.
C. 2tandard un#ualified opinion.
6. Ad&erse opinion.

Difficulty: Medium
Source: AICA

17-%/
Chapter 17 - Auditors' Reports
+7. A limitation on the scope of the audit sufficient to preclude an un#ualified opinion will
alwas result when mana!ement9
A. As;s the auditor to report on the balance sheet and not on the other basic financial
statements.
$" Refuses to permit its lawer to respond to the letter of audit in#uir.
C. 6iscloses material related part transactions in the notes to the financial statements.
6. Dnows that confirmation of accounts recei&able is not feasible.

Difficulty: Medium
Source: AICA

+/. 6oe" an independent auditor" was en!a!ed to perform an audit of the financial statements
of All ,ncorporated one month after its fiscal ear had ended. Althou!h the in&entor count
was not obser&ed b 6oe" and accounts recei&able were not confirmed b direct
communication with debtors" 6oe was able to !ain satisfaction b applin! alternati&e
auditin! procedures. 6oe's audit report will probabl contain9
A" A standard un#ualified opinion.
*. An un#ualified opinion and an e$planator para!raph.
C. 4ither a #ualified opinion or a disclaimer of opinion.
6. An .e$cept for. #ualification.

Difficulty: Hard
Source: AICA

+0. The fourth reportin! standard re#uires the auditor's report to contain either an e$pression
of opinion re!ardin! the financial statements" ta;en as a whole" or an assertion to the effect
that an opinion cannot be e$pressed. The ob:ecti&e of the fourth standard is to pre&ent9
A. The C(A from reportin! on one basic financial statement and not the others.
$" <isinterpretations re!ardin! the de!ree of responsibilit that the auditor is assumin!.
C. The C(A from e$pressin! different opinions on each of the basic financial statements.
6. <ana!ement from reducin! its final responsibilit for the basic financial statements.

Difficulty: Medium
Source: AICA

17-%0
Chapter 17 - Auditors' Reports
-1. The principal auditor is satisfied with the independence and professional reputation of the
other auditor who has audited a subsidiar. To indicate the di&ision of responsibilit" the
principal auditor should modif9
A" The introductor" scope" and opinion para!raphs of the report.
*. )nl the scope para!raph of the report.
C. )nl the opinion para!raph of the report.
6. )nl the opinion para!raph of the report and include an e$planator para!raph.

Difficulty: Medium
Source: AICA

-1. <or!an" C(A" is the principal auditor for a multinational corporation. Another C(A has
e$amined and reported on the financial statements of a si!nificant subsidiar of the
corporation. <or!an is satisfied with the independence and professional reputation of the
other auditor" as well as the #ualit of the other auditor's audit. With respect to <or!an's
report on the consolidated financial statements" ta;en as a whole" <or!an9
A. <ust not refer to the audit of the other C(A.
*. <ust refer to the audit of the other C(A.
C" <a refer to the audit of the other C(A.
6. <a refer to the audit of the other C(A" in which case <or!an must include in the audit
report on the consolidated financial statements a #ualified opinion with respect to the audit of
the other C(A.

Difficulty: Medium
Source: AICA

-2. When reportin! on comparati&e financial statements where the financial statements of the
prior period ha&e been e$amined b a predecessor auditor whose report is not presented" the
successor auditor should indicate in the report9
A. The reasons wh the predecessor auditor's report is not presented.
*. The identit of the predecessor auditor who e$amined the financial statements of the prior
ear.
C. Whether the predecessor auditor's re&iew of the current ear's financial statements re&ealed
an matter that mi!ht ha&e a material effect on the successor auditor's opinion.
#" The tpe of opinion e$pressed b the predecessor auditor.

Difficulty: Hard
Source: AICA

17-'1
Chapter 17 - Auditors' Reports
-%. ,f an accountin! chan!e has no material effect on the financial statements in the current
ear" but the chan!e is reasonabl certain to ha&e a material effect in later ears" the chan!e
should be9
A. Referred to in the auditor's report for the current ear.
$" 6isclosed in the notes to the financial statements of the current ear.
C. 6isclosed in the notes to the financial statements and referred to in the auditor's report for
the current ear.
6. Treated as a subse#uent e&ent.

Difficulty: Hard
Source: AICA

-'. When financial statements of a prior period are presented on a comparati&e basis with
financial statements of the current period" the continuin! auditor is responsible for9
A. 4$pressin! dual dated opinions.
*. @pdatin! the report on the pre&ious financial statements onl if there has not been a chan!e
in the opinion.
C. @pdatin! the report on the pre&ious financial statements onl if the pre&ious report was
#ualified and the reasons for the #ualification no lon!er e$ist.
#" @pdatin! the report on the pre&ious financial statements re!ardless of the opinion
pre&iousl issued.

Difficulty: Hard
Source: AICA

-+. An auditor has been as;ed to report on the balance sheet of Dane Compan but not on the
other basic financial statements. The auditor will ha&e access to all information underlin! the
basic financial statements. @nder these circumstances" the auditor9
A" <a accept the en!a!ement because such en!a!ements merel in&ol&e limited reportin!
ob:ecti&es.
*. <a accept the en!a!ement but should disclaim an opinion because of an inabilit to appl
the procedures considered necessar.
C. 2hould refuse the en!a!ement because there is a client-imposed scope limitation.
6. 2hould refuse the en!a!ement because of a departure from !enerall accepted auditin!
standards.

Difficulty: Medium
Source: AICA

17-'1
Chapter 17 - Auditors' Reports
--. When the auditor is unable to determine the amounts associated with the ille!al acts of
client personnel because of an inabilit to obtain ade#uate e&idence" the auditor should issue
a7an89
A. .2ub:ect to. #ualified opinion.
$" 6isclaimer of opinion.
C. Ad&erse opinion.
6. @n#ualified opinion with a separate e$planator para!raph.

Difficulty: Medium
Source: AICA

-7. ,f the principal auditor decides to ma;e reference to the other auditor's audit" the
introductor para!raph must specificall indicate the9
A" <a!nitude of the portion of the financial statements e$amined b the other auditor.
*. =ame of the other auditor.
C. =ame of the consolidated subsidiar e$amined b the other auditor.
6. Tpe of opinion e$pressed b the other auditor.

Difficulty: Medium
Source: AICA

-/. Which of the followin! will result in e$planator lan!ua!e as to consistenc in the
auditor's report" re!ardless of whether the item is full disclosed in the financial statements5
A. A chan!e in accountin! estimate.
$" A chan!e from an unacceptable accountin! principle to a !enerall accepted one.
C. Correction of an error not in&ol&in! a chan!e in accountin! principle.
6. A chan!e in classification.

Difficulty: Easy
Source: AICA

17-'2
Chapter 17 - Auditors' Reports
-0. An auditor's report on comparati&e financial statements should be dated as of the date of
the9
A. ,ssuance of the report.
$" Accumulation of sufficient appropriate audit e&idence.
C. >atest financial statements bein! reported on.
6. >ast related-part transaction disclosed in the statements.

Difficulty: Medium
Source: AICA

71. ,n which of the followin! circumstances would an auditor of financial statements be most
li;el to e$press an ad&erse opinion5
A" The statements are not in conformit with the FA2* 2tatements re!ardin! the
capitaliBation of leases.
*. ,nformation comes to the auditor's attention that raises substantial doubt about the entit's
abilit to continue in e$istence.
C. The chief e$ecuti&e officer refuses the auditor access to minutes of board of directors'
meetin!s.
6. Tests of controls show that the entit's internal control is so poor that it can not be relied
upon.

Difficulty: Medium
Source: AICA


Essay Questions

17-'%
Chapter 17 - Auditors' Reports
71. William E (laud are principle auditors for the >owell Corporation. )ne of the subsidiaries
of >owell Corporation" Wilson <anufacturin! Co." is audited b >le E Adams.
a. ,f William E (laud ma;e reference in their report to reliance on the report of other auditors
are the #ualifin! their opinion5 4$plain.
b. Re!ardless of whether William E (laud ma;e reference to reliance on the report of the
other auditors" the should perform certain procedures with respect to >le and Adams' audit.
What are these procedures5
a. =o. The auditors are indicatin! a di&ision of responsibilit between them and the other
auditors.
b. The auditors should9
<a;e in#uiries concernin! the other auditors' professional reputation.
)btain a letter from the other auditors statin! that the are aware of the use of their report
and that the are independent with respect to the client.

Difficulty: Easy

72. @pon completin! an audit" the auditors should issue an opinion on the client's financial
statements.
a. >ist the conditions that permit the issuance of an un#ualified opinion on the financial
statements.
b. 6escribe three situations in which the auditors ma modif their standard report and still
issue an un#ualified opinion.
a. The conditions that permit issuance of an un#ualified opinion include9
1. The financial statements are presented in conformit with !enerall accepted accountin!
principles" includin! ade#uate disclosure.
2. The audit was performed in accordance with !enerall accepted auditin! standards and
there were no si!nificant scope limitations pre&entin! the auditors from !atherin! the
e&idence necessar to support their opinion.
b. <odifications of the auditors' report that do not result in #ualification include 7onl three
re#uired89
Reliance upon other auditors 7shared responsibilit audits8.
4mphasis of a matter.
6eparture from an officiall reco!niBed accountin! principle because application would
result in materiall misleadin! financial statements.
A #uestion about a compan's abilit to remain a !oin! concern.
?AA( not consistentl applied.

Difficulty: Medium

17-''
Chapter 17 - Auditors' Reports
7%. ,dentif the deficiencies 7includin! both incorrect statements and omissions8 contained in
the auditors' report on a nonpublic compan as drafted below. Fou will recei&e credit for those
ou properl identif" and lose credit for those ou identif which aren't actuall deficiencies.
Auditors' Report
To the *oard of 6irectors and <ana!ement
3FG Compan
We ha&e re&iewed the consolidated balance sheet of 3FG Compan as of 6ecember %1"
2133" and the related statements of income" retained earnin!s" and cash flows for the ear
then ended. )ur responsibilit is to e$press an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with !enerall accepted accountin! standards. Those
standards re#uire that we plan and perform the audit to obtain absolute assurance about
whether the financial statements are free of material misstatement. An audit includes
e$aminin!" on a test basis" e&idence supportin! the amounts and disclosures in the financial
statements. An audit also includes assessin! the accountin! principles used and si!nificant
estimates made b mana!ement" as well as e&aluatin! the o&erall financial statement
presentation. We belie&e that our audit pro&ides a reasonable basis for our opinion.
,n our opinion" the financial statements referred to abo&e present the financial position of
3FG Compan as of 6ecember %1" 2133" and the results of operations and its cash flows for
the ear then ended in conformit with auditin! standards !enerall accepted in the @nited
2tates of America applied on a consistent basis with the precedin! ear.
Art Foun!ster E Co.
Certified (ublic Accountants
(hoeni$" AriBona
6ecember %1" 2133
The report contains the followin! deficiencies9
1. ,ntroductor para!raph
,n sentence 1" the word .re&iewed. should be .audited..
The sentence on the responsibilit of mana!ement is omitted.
2. 2cope (ara!raph
2entence 1 should state that the audit was performed in accordance with auditin! standards
!enerall accepted in the @nited 2tates of America.
2entence 2 should state that an audit pro&ides .reasonable". not .absolute. assurance.
%. )pinion (ara!raph
.Auditin! standards. should be .accountin! principles..
=o mention of consistenc should be made.
17-'+
Chapter 17 - Auditors' Reports
'. )ther
The word .independent. should be included in the report's title.
The report should be dated as of the last da of field wor;" not the last da of the ear bein!
audited.

Difficulty: Hard

17-'-
Chapter 17 - Auditors' Reports
7'. @se the accompanin! solution sheet to repl to all of the situations below that relate to
the audit of financial statements of nonpublic companies. @nless indicated otherwise" assume
that material amounts are in&ol&ed.

A compan has departed from ?AA( for what the auditor considers to be un:ustified reasons.

A compan's in&entor records were deficient and the auditor was re#uired to satisf herself
that the in&entor was properl stated usin! alternati&e procedures. 2he is satisfied with the
results of those procedures.

,n auditin! a client" an auditor has determined that substantial doubt e$ists about an entit's
abilit to continue as a !oin! concern.

A principal auditor decides not to ta;e responsibilit for the wor; of another C(A who audited
a 71H owned subsidiar and issued an un#ualified opinion. The total assets and re&enues of
the subsidiar are +H and /H" respecti&el" of the total assets and re&enues of the entit bein!
audited.

A compan chan!es from F,F) to >,F) for in&entor &aluation and the auditor concurs with
the chan!e. The chan!e has a material effect on the comparabilit of the entit's financial
statements this ear" but is e$pected to ha&e an immaterial effect in the future.

A client is issuin! two ears of comparati&e financial statements. The first ear was audited
b another auditor who" after performin! the appropriate procedures" has updated and reissued
her audit report. 7=)T49 Fou are replin! as to the proper report to be issued at the end of the
second ear.8I%J

A compan has included incorrect other information in a client prepared document containin!
audited statements. The financial statements are correct" but the president's letter is incorrect.

A client has chan!ed its estimate of li;el doubtful accounts from 2H of credit sales to %H.
The auditor belie&es the chan!e to be reasonable.I2J

Repl as to the followin! three factors relatin! to the appropriate audit report7s8 for each of
the situations. <ore than one tpe of opinion and placement of e$planator para!raph repl
ma be appropriate.
Circumstances--)ther auditors" !oin! concern" consistenc" emphasis of a matter" :ustified
departure from ?AA(" un:ustified departure from ?AA(" 2cope >imitation 71 of these must
be selected e$cept for numbers - and 78.
17-'7
Chapter 17 - Auditors' Reports
Tpes of )pinion
A. 2tandard un#ualified
*. @n#ualified with an e$planator para!raph
C. @n#ualified with e$planator lan!ua!e" but no e$planator para!raph.
6. Aualified
4. 6isclaimer
F. Ad&erse
,f more than one tpe of opinion is appropriate list each.
(lacement of e$planator para!raph--before opinion para!raph" after opinion para!raph"
either before or after the opinion para!raph" not applicable since there is no e$planator
para!raph. 7,f more than one tpe of opinion was appropriate" pro&ide a separate repl for
placement of e$planator para!raph for each.8



Difficulty: Hard

17-'/