Auditing and Assurance Services, 17e (Arens/Elder/Beasley)

Chapter 3 Audit Reports

3.1 Learning Objective 3-1

1) Which of the following is a correct statement regarding the standard unmodified opinion audit
report?
A) The format of the audit report for public and nonpublic entities are identical.
B) The auditor's responsibility paragraph includes a statement that the auditors are responsible
for selecting the appropriate accounting principles.
C) The audit report includes the name of the lead partner on the audit.
D) The auditor's responsibilities paragraph includes a statement that the auditor considers
internal controls when designing the audit procedures performed.

2) Auditing standards require that the audit report must be titled and that the title must
A) include the word "independent."
B) indicate if the auditor is a CPA.
C) indicate if the auditor is a proprietorship, partnership, or corporation.
D) indicate the type of audit opinion issued.

3) To emphasize the fact that the auditor is independent, a typical addressee of the audit report
could be
A)
Company Controller Shareholders Board of Directors
No Yes Yes

B)
Company Controller Shareholders Board of Directors
No No Yes

C)
Company Controller Shareholders Board of Directors
Yes Yes No

D)
Company Controller Shareholders Board of Directors
Yes No No

4) The auditor's responsibilities section of the standard unmodified opinion audit report states
that the audit is designed to
A) discover all errors and/or irregularities.
B) discover material errors and/or irregularities.
C) conform to generally accepted accounting principles.
D) obtain reasonable assurance whether the statements are free of material misstatement.

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5) The audit report date on a standard unmodified opinion audit report indicates
A) the last day of the fiscal period.
B) the date on which the financial statements were filed with the Securities and Exchange
Commission.
C) the last date on which users may institute a lawsuit against either the client or the auditor.
D) the last day of the auditor's responsibility for the review of significant events that occurred
after the date of the financial statements.

6) The standard audit report for nonpublic entities refers to GAAS and GAAP in which sections?
A)
GAAS GAAP
Auditor's Responsibilities Auditor's Responsibilities
paragraph paragraph

B)
GAAS GAAP
Auditor's Responsibilities Auditor's Opinion
paragraph paragraph

C)
GAAS GAAP
Management's Management's
Responsibilities and Responsibilities and
Auditor's Opinion Auditor's Opinion
paragraphs paragraphs

D)
GAAS GAAP
Management's
Auditor's responsibilities Responsibilities and
and Basis for Opinion Auditor's Opinion
paragraphs paragraphs

7) Which of the following is not explicitly stated in the standard unmodified opinion audit
report?
A) The financial statements are the responsibility of management.
B) The audit was conducted in accordance with generally accepted accounting principles.
C) The auditors believe that the audit evidence provides a reasonable basis for their opinion.
D) An audit includes assessing the accounting estimates used.

8) The standard unmodified opinion audit report for a nonpublic entity must
A) have a report title that includes the word "CPA."
B) be addressed to the company's stockholders and creditors.
C) be dated.
D) include an explanatory paragraph.

9) The management's responsibilities section of the standard unmodified opinion audit report for
a nonpublic company states that the financial statements are
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A) the responsibility of the auditor.
B) the responsibility of management.
C) the joint responsibility of management and the auditor.
D) none of the above.

10) The first paragraph of the standard unmodified opinion audit report for a nonpublic company
effective for audits of financial statements for fiscal years ending on or after June 15, 2019
performs which of the following functions?
I. Presents the auditors' opinion, first.
II. Provides additional information related to the responsibilities of management for preparing
the financial statements.
III. Provides additional information regarding the responsibilities of the auditor in conducting the
audit.
A) I only
B) I and II
C) II and III
D) I and III

11) Which of the following statements are true for the standard unmodified opinion audit report
of a nonpublic entity for fiscal years ending on or after June 15, 2019?
I. The management's responsibilities paragraph states that management is responsible for the
preparation and the fair presentation of the financial statements.
II. The opinion paragraph is stated as a statement of absolute fact and a guarantee by the auditor.
A) I only
B) II only
C) I and II
D) Neither I nor II

12) The auditor's responsibilities section of the standard unmodified opinion audit report states
that the auditor is
A) responsible for the financial statements and the opinion on them.
B) responsible for the financial statements.
C) exercising professional judgment throughout the audit.
D) expressing an opinion on the effectiveness of internal controls.

13) If the balance sheet of a private company is dated December 31, 2018, the audit report is
dated February 8, 2019, and both are released on February 15, 2019, this indicates that the
auditor has searched for subsequent events that occurred up to
A) December 31, 2018.
B) January 1, 2019.
C) February 8, 2019.
D) February 15, 2019.

14) The appropriate audit report date for a standard unmodified opinion audit report for a
nonpublic entity should be
A) the date the financial statements are given to the Board of Directors.
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B) the date of the financial statements.
C) the date the auditor completed the auditing procedures in the field.
D) 60 days after the date of the financial statements as required by the SEC.

15) Most auditors believe that financial statements are "presented fairly" when the statements are
in accordance with GAAP, and that it is also necessary to
A) determine that they are not in violation of FASB statements.
B) examine the substance of transactions and balances for possible misinformation.
C) review the statements using the accounting principles promulgated by the SEC.
D) assure investors that net income reported this year will be exceeded in the future.

16) An audit provides a guarantee that a material misstatement will not exist in the financial
statements.

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

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

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

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

21) The basis of opinion section of the audit report issued for financial statements of a nonpublic
company should refer to auditing standards generally accepted in the United States of America.

22) In the auditor's responsibilities paragraph of the audit report issued for financial statements
of a nonpublic company, the auditor expresses an opinion about the internal controls of the
company.

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

24) The phrase "accounting principles generally accepted in the United States of America" can
be found in the auditor's opinion paragraph of a standard unmodified opinion report.

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

26) The phrase "auditing standards generally accepted in the United States of America" can be
found in the auditor's opinion paragraph of a standard unmodified opinion report for a nonpublic
company.

27) The phrase "Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free from material error" is included in the
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auditor's opinion section of an audit report.

28) The European Union has not yet implemented requirements for mandatory audit rendering
and auditor rotation despite many years of debate on this subject.

29) The Auditing Standards Board (ASB) sets auditing standards in the U.S. for nonpublic
entities.

30) The PCAOB and the AICPA recently adopted new auditor reporting standards which are
designed to make the standard audit report less informative for users.

3.2 Learning Objective 3-2

1) What category of audit report will be issued if the auditor concludes that the financial
statements are not fairly presented?
A) disclaimer
B) qualified
C) standard unmodified opinion
D) adverse

2) The standard unmodified audit report

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

3) An audit of historical financial statements most commonly includes the

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

4) When analyzing the various types of audit reports,

A) the unmodified opinion with an emphasis-of-matter paragraph is the most common type of
report.
B) companies will generally make the appropriate changes to their accounting records to avoid a
qualification by the auditor.
C) management is more concerned about a qualified report than a disclaimer report.
D) an adverse report is issued when the auditor is unable to form an opinion on the financial
statements.

5) Financial statement users are normally much more concerned about a disclaimer than an
unmodified opinion audit report that contains an additional emphasis-of-matter paragraph.

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6) An auditor will issue a disclaimer when he or she concludes that the financial statements are
not fairly presented.

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

3.3 Learning Objective 3-3

1) Whenever an auditor issues an audit report for a public company, the auditor can choose to
issue a report in which of the following forms?
I. A combined report on financial statements and internal control over financial reporting
II. Separate reports on financial statements and internal control over financial reporting
A) I only
B) II only
C) either I or II
D) neither I nor II

2) The unqualified opinion audit report for public entities includes which of the following
sections and/or paragraphs?
A) report title, address, and opinion
B) basis for opinion and discussion of critical audit areas
C) auditor information and date
D) All of the above are included.

3) Auditing standards for public companies are established by the

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

4) Under PCAOB standards,

A) the standard unmodified opinion audit report is referred to as an unqualified opinion audit
report.
B) the scope paragraph states that the financial statements are the responsibility of management.
C) internal controls of a public company must be audited every five years.
D) the scope paragraph is the same as the scope paragraph for private companies.

5) The separate report on internal control over financial reporting

A) cannot contain a cross-reference to the auditor's report on the financial statements.
B) includes a paragraph that addresses the inherent limitations of internal controls.
C) is addressed to the PCAOB.
D) includes a scope paragraph which refers to the framework used to evaluate internal controls.

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

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

8) PCAOB standards use the term "unqualified opinion" to refer to the standard unmodified
opinion audit report.

9) If the auditor also issues a separate report on internal control over financial reporting for a
public company, the additional paragraph following the opinion paragraph is included to
reference the audit report on internal control.

10) The basis for opinion paragraph of the audit report for a public company is worded exactly
the same as the basis for opinion section for a U.S. nonpublic company.

11) Similar to AICPA standards, the new PCAOB standard requires the auditor to disclose
critical audit matters in the auditor's report.

12) The critical audit matters section of the auditor's report notes that this communication of
critical audit matters alters the auditor's opinion on the financial statements.

13) PCAOB audit report requirements require the auditor to include the auditor's signature,
tenure, city and state where the audit firm is located, as well as the audit report date.

14) The PCAOB expects that in most audits, the auditor will determine that at least one matter
involved especially challenging, subjective, or complex auditor judgment.

15) If the auditor concludes there are no critical audit matters, the auditor is not required to
disclose this fact in the audit report.

16) The critical audit matters section of the audit report is required for audits of fiscal years
ending on or after June 30, 2019 for large companies, and fiscal years ending on or after
December 31, 2020 for all other audits to which these requirements apply.

17) PCAOB auditing standards require the disclosure of the audit engagement partner's name and
other accounting firms participating in the audit engagement in the audit report.

18) With regards to critical audit matters as defined by the PCAOB, the auditor would likely
consider what type(s) of issues that involved "especially challenging, subjective, or complex
auditor judgment" matters? Name at least three specific matters.

3.4 Learning Objective 3-4

1) Examples of unmodified opinions which contain modified wording (without adding an

emphasis-of-matter paragraph) include
A) reports involving other auditors.
B) the lack of consistent application of generally accepted accounting principles.
C) substantial doubt about the audited company (or the entity) continuing as a going concern.
D) lack of consistent application of GAAP.
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2) A CPA may wish to emphasize specific matters regarding the financial statements even
though an unqualified opinion will be issued. Normally, such explanatory information is
A) included in the scope paragraph.
B) included in the opinion paragraph.
C) included in a separate paragraph in the report.
D) included in the introductory paragraph.

3) All of the following are causes for the addition of an emphasis of a matter paragraph under
both AICPA and PCAOB standards except for
A) emphasis of a matter.
B) reports involving other auditors.
C) lack of consistent application of generally accepted accounting principles.
D) auditor agrees with a departure from promulgated accounting principles.

4) The term "explanatory paragraph" was replaced in the AICPA auditing standards with
A) going concern paragraph.
B) emphasis-of-matter paragraph.
C) departure from principles paragraph.
D) consistency paragraph.

5) Which of the following are changes that affect the comparability of financial statements but
not the consistency and therefore, do not have to be included in the auditor's report?
A) error corrections not involving principles
B) changes in accounting estimates
C) variations in the format and presentation of financial information
D) all of the above

6) Which of the following is least likely to cause uncertainty about the ability of an entity to
continue as a going concern?
A) The entity is suing a competitor for a minor patent infringement.
B) The entity has lost a major customer.
C) The entity has significant recurring operating losses.
D) The entity has working capital deficiencies.

7) When there is uncertainty about a company's ability to continue as a going concern, the
auditor's concern is the possibility that the client may not be able to continue its operations or
meet its obligations for a "reasonable period of time." For this purpose, a reasonable period of
time is considered not to exceed
A) six months from the date of the financial statements.
B) one year from the date of the financial statements.
C) six months from the date of the audit report.
D) one year from the date of the audit report.

8) When the auditor concludes that there is substantial doubt about the entity's ability to continue
as a going concern, the appropriate audit report could be
I. an unmodified opinion audit report with an explanatory paragraph.
II. a disclaimer of opinion.
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A) I only
B) II only
C) I or II
D) Neither I nor II

9) When a company's financial statements contain a departure from GAAP with which the
auditor concurs, the departure should be explained in
A) the scope paragraph.
B) an introductory paragraph.
C) the opinion paragraph.
D) a separate paragraph.

10) William Gregory, CPA, is the principal auditor for an international corporation. Another
CPA has examined and reported on the financial statements of a significant subsidiary of the
corporation. Gregory is satisfied with the independence and professional reputation of the other
auditor, as well as the quality of the other auditor's examination. With respect to his report on the
consolidated financial statements, taken as a whole, Gregory
A) must not refer to the examination of the other auditor.
B) must refer to the examination of the other auditor.
C) may refer to the examination of the other auditor.
D) must refer to the examination of the other auditors along with the percentage of consolidated
assets and revenue that they audited.

11) A company has changed its method of inventory valuation from an unacceptable one to one
in conformity with generally accepted accounting principles. The auditor's report on the financial
statements of the year of the change should include
A) no reference to consistency.
B) a reference to a prior period adjustment in the opinion paragraph.
C) an explanatory paragraph that justifies the change and explains the impact of the change on
reported net income.
D) an explanatory paragraph explaining the change.

12) Which of the following modifications of the auditor's report does not include an explanatory
paragraph?
A) A qualified report is due to a GAAP departure.
B) The report includes an emphasis of a matter.
C) There is a very material scope limitation.
D) A principal auditor accepts the work of another auditor.

13) No reference is made in the auditor's report to other auditors who perform a portion of the
audit when
I. the other auditor audited an immaterial portion of the audit.
II. the other auditor is well known or closely supervised by the principle auditor.
III. the principle auditor has thoroughly reviewed the work of the other auditor.
A) I and II
B) I and III
C) II and III
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D) I, II and III

14) When an auditor is trying to determine how changes can affect consistency and/or
comparability, he or she should keep in mind that
A) changes that affect comparability but not consistency require an explanatory paragraph.
B) items that materially affect the comparability of financial statements requires a disclaimer of
opinion.
C) changes that affect consistency require an explanatory paragraph if they are material.
D) changes that involve either comparability or consistency only need to be mentioned in the
footnotes.

15) All of the following would require an emphasis of matter paragraph except for
A) the existence of material related party transactions.
B) the lack of auditor independence.
C) important events occurring subsequent to the balance sheet date.
D) material uncertainties disclosed in the footnotes.

16) Under AICPA auditing standards, the primary auditor issuing the opinion on the financial
statements is called the
A) component auditor.
B) principal auditor.
C) group engagement partner.
D) majority auditor.

17) Which of the following is false concerning the principal CPA firm's alternatives when
issuing a report when another CPA firm performs part of the audit?
A) Issue a joint report signed by both CPA firms.
B) Make no reference to the other CPA firm in the audit report, and issue the standard
unqualified opinion.
C) Make reference to the other auditor in the report by using modified wording (a shared opinion
or report).
D) A qualified opinion or disclaimer, depending on materiality, is required if the principal
auditor is not willing to assume any responsibility for the work of the other auditor.

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

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19) Indicate which change(s) would require an explanatory paragraph in the audit report.
A)
Correction of an error by changing from Change from LIFO to FIFO
an accounting principle that is not
generally acceptable to one that is
generally acceptable
Yes Yes

B)
Correction of an error by changing from Change from LIFO to FIFO
an accounting principle that is not
generally acceptable to one that is
generally acceptable
No No

C)
Correction of an error by changing from Change from LIFO to FIFO
an accounting principle that is not
generally acceptable to one that is
generally acceptable
Yes No

D)
Correction of an error by changing from Change from LIFO to FIFO
an accounting principle that is not
generally acceptable to one that is
generally acceptable
No Yes

20) Indicate which change(s) would require an explanatory paragraph in the audit report.
A)
Change in the estimated life Variation in the format of the
of an asset financial statements
Yes Yes

B)
Change in the estimated life Variation in the format of the
of an asset financial statements
No No

C)
Change in the estimated life Variation in the format of the
of an asset financial statements
Yes No

D)
Change in the estimated life Variation in the format of the
of an asset financial statements
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 No Yes

21) Indicate which change(s) would require an explanatory paragraph in the audit report.
A)
The CPA concludes there is Change from FIFO to LIFO
substantial doubt about the
entity's ability to continue as a
going concern.
Yes Yes

B)
The CPA concludes there is Change from FIFO to LIFO
substantial doubt about the
entity's ability to continue as a
going concern.
No No

C)
The CPA concludes there is Change from FIFO to LIFO
substantial doubt about the
entity's ability to continue as a
going concern.
Yes No

D)
The CPA concludes there is Change from FIFO to LIFO
substantial doubt about the
entity's ability to continue as a
going concern.
No Yes

22) Indicate which change(s) would require an explanatory paragraph in the audit report.
A)
Changes in reporting entities, Make reference to the work of
such as the inclusion of an another auditor to indicate
additional company in the shared responsibility in an
combined financial statements unqualified opinion.
Yes Yes

B)
Changes in reporting entities, Make reference to the work of
such as the inclusion of an another auditor to indicate
additional company in the shared responsibility in an
combined financial statements unqualified opinion.
No No

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C)
Changes in reporting entities, Make reference to the work of
such as the inclusion of an another auditor to indicate
additional company in the shared responsibility in an
combined financial statements unqualified opinion.
Yes No

D)
Changes in reporting entities, Make reference to the work of
such as the inclusion of an another auditor to indicate
additional company in the shared responsibility in an
combined financial statements unqualified opinion.
No Yes

23) When there is a lack of consistent application in accounting principles,

A) the nature and impact of the change should be adequately disclosed.
B) the auditor should discuss the nature of the change and point the reader to the footnote that
discusses the change.
C) the materiality of the change is evaluated based on the current year effect of the change.
D) all of the above.

24) Under PCOAB auditing standards, the primary auditor issuing the opinion on the financial
statements is called the
A) component auditor.
B) principal auditor.
C) group engagement partner.
D) majority auditor.

25) An unmodified opinion audit report with an emphasis-of-matter paragraph is issued when the
auditor believes the financials are fairly stated but also believes additional information should be
provided.

26) Changes in accounting estimates requires the auditor to issue a modified audit report with a
consistency paragraph inserted after the opinion paragraph.

27) The only unmodified opinion audit report that does not include an explanatory paragraph is
when other auditors are involved. In this case only the introductory paragraph is modified.

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

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

30) Changes in reporting entities, such as the inclusion of an additional company in combined
financial statements, affect comparability but not consistency, and therefore do not require an

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explanatory paragraph in the audit report.

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

32) When other auditors are involved in the audit and they qualify their portion of the audit, the
principal auditor must decide if the amount in question is material to the financial statements as a
whole.

33) The unmodified opinion audit report with emphasis-of-matter paragraph does not meet the
criteria of a complete audit with satisfactory results.

34) When there is a lack of consistent application of GAAP due to a new accounting
pronouncement, no explanatory paragraph is required.

3.5 Learning Objective 3-5

1) As a result of management's refusal to permit the auditor to physically examine inventory, the
auditor must depart from the unmodified opinion audit report because
A) the financial statements have not been prepared in accordance with GAAP.
B) the scope of the audit has been restricted by circumstances beyond either the client's or
auditor's control.
C) the financial statements have not been audited in accordance with GAAS.
D) the scope of the audit has been restricted.

2) An adverse opinion is issued when the auditor believes

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

3) An auditor can express a qualified opinion due to a

A)
Departure from Lack of Consistency Lack of Sufficient
GAAP Evidence
Yes No No

B)
Departure from Lack of Consistency Lack of Sufficient
GAAP Evidence
No Yes No

C)
Departure from Lack of Consistency Lack of Sufficient
GAAP Evidence
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 Yes No Yes

D)
Departure from Lack of Consistency Lack of Sufficient
GAAP Evidence
Yes Yes Yes

4) An auditor determines the financial statements include at least a material departure from
GAAP. Which type of opinion may be issued?
A)
Disclaimer Qualified Adverse
Yes No No

B)
Disclaimer Qualified Adverse
No Yes No

C)
Disclaimer Qualified Adverse
Yes No Yes

D)
Disclaimer Qualified Adverse
No Yes Yes

5) A qualified opinion can be issued for which of the following?

I. When a limitation on the scope of the audit has occurred
II. When the auditor lacks independence
III. When generally accepted accounting principles have not been used
A) I and II
B) I and III
C) II and III
D) I, II and III

6) In which situation would the auditor be choosing between "except for" qualified opinion and
an adverse opinion?
A) The auditor lacks independence.
B) A client-imposed scope limitation
C) A circumstance-imposed scope limitation
D) Lack of full disclosure within the footnotes

7) When the auditor determines that the financial statements are fairly stated, but there is a
nonindependent relationship between the auditor and the client, the auditor should issue
A) an adverse opinion.
B) a disclaimer of opinion.
C) either a qualified opinion or an adverse opinion.

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D) either a qualified opinion or an unqualified opinion with modified wording.

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

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

9) If the phrase "except for" is present in the opinion paragraph of the audit report, the auditor
has issued a(n)
A) adverse opinion.
B) disclaimer of opinion.
C) unqualified opinion.
D) qualified opinion.

10) When analyzing the various types of opinions that the auditor can issue,
A) an adverse opinion must contain the phrase "except for" in the opinion paragraph.
B) an adverse opinion can only be issued when there is a lack of knowledge by the auditor.
C) a disclaimer of opinion can be issued for material or immaterial misstatements.
D) a qualified opinion report can be used only when the auditor concludes that the overall
financial statements are fairly stated.

11) Items that materially affect the comparability of financial statements generally require
disclosure in the footnotes. If the client refuses to properly disclose the item, the auditor will
most likely issue
A) a disclaimer.
B) an unqualified opinion.
C) a qualified opinion.
D) an adverse opinion.

12) Which of the following scenarios does not result in a qualified opinion?
A) A scope limitation prevents the auditor from completing an important audit procedure.
B) Circumstances exist that prevent the auditor from conducting a complete audit.
C) The auditor lacks independence with respect to the audited entity.
D) An accounting principle at variance with GAAP is used.

13) Whenever the client imposes restrictions on the scope of the audit, the auditor should be
concerned that management may be trying to prevent discovery of misstatements. In such cases,
the auditor will likely issue a
A) disclaimer of opinion in all cases.
B) qualification of both scope and opinion in all cases.
C) disclaimer of opinion whenever materiality is in question.
D) qualification of both scope and opinion whenever materiality is in question.

14) In which of the following circumstances would an auditor most likely express an adverse
opinion?
A) The CEO refuses to let the auditor have access to the board of director meeting minutes.
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B) The financial statements are not in conformity with the FASB statement on loss
contingencies.
C) Information comes to the auditor's attention that raises substantial doubt about the ability for
the client to continue as a going concern.
D) Tests of controls show that the internal control structure is so poor that the auditor has to
assess control risk at the maximum.

15) Which of the following statements is true?

I. The auditor is required to issue a disclaimer of opinion in the event of a material uncertainty.
II. The auditor is required to issue a disclaimer of opinion in the event of a going concern
problem.
A) I only
B) II only
C) I and II
D) Neither I nor II

16) The most common case in which conditions beyond the client's and auditor's control cause a
scope restriction in an engagement is when the
A) auditor is not appointed until after the client's year-end.
B) client won't allow the auditor to confirm receivables for fear of offending its customers.
C) auditor doesn't have enough staff to satisfactorily audit all of the client's foreign subsidiaries.
D) client is going through Chapter 11 bankruptcy.

17) When the client fails to make adequate disclosure in the body of the statements or in the
related footnotes, it is the responsibility of the auditor to
A) inform the reader that disclosure is not adequate, and to issue an adverse opinion.
B) inform the reader that disclosure is not adequate, and to issue a qualified opinion.
C) present the information in the audit report and issue an unqualified or qualified opinion.
D) present the information in the audit report and to issue a qualified or an adverse opinion.

18) A qualified opinion audit report is issued when all auditing conditions have been met, no
significant misstatements have been discovered, and it is the auditor's opinion that the financial
statements are fairly stated in accordance with GAAP.

19) Auditors should issue a disclaimer of opinion when there is a highly material client-imposed
scope restriction.

20) Whenever an auditor issues a qualified report, he or she must use the term "except for " in
the opinion paragraph.

21) A qualified report can take the form of a qualification of both the scope and the opinion or of
the opinion alone.

22) When an auditor discovers a highly material GAAP violation in the financial statements and
the client refuses to correct it, the auditor should issue a disclaimer of opinion.

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23) Client imposed restrictions on the audit always require a disclaimer of opinion.

24) An auditor should issue a qualified opinion with an explanatory paragraph whenever there is
a material uncertainty affecting the financial statements.

25) There are three conditions necessitating a departure from an unqualified audit report. Name,
discuss and state the appropriate audit report for each of these three conditions.

3.6 Learning Objective 3-6

1) A misstatement in the financial statements can be considered material if knowledge of the

misstatement will affect a decision of
A) the PCAOB.
B) a reasonable user of the financial statements.
C) an accountant.
D) the SEC.

2) Misstatements must be compared with some measurement base before a decision can be made
about materiality. A commonly accepted measurement base includes
A) net income.
B) total assets.
C) working capital.
D) all of the above.

3) When comparing misstatements with a measurement base, the auditor must consider the
pervasiveness of the misstatement. Of the following examples, the most pervasive misstatement
is a(n)
A) understatement of inventory.
B) understatement of retained earnings caused by a miscalculation of dividends payable.
C) misclassification of notes payable as a long-term liability when it should be current.
D) misclassification of salary expense as a selling expense.

4) The dollar amount of some misstatements cannot be accurately measured. For example, if the
client were unwilling to disclose an existing lawsuit, the auditor must estimate the likely effect
on
A) net income.
B) users of the financial statements.
C) the auditor's exposure to lawsuits.
D) management's future decisions.

5) If most or all users' decisions that are based on the financial statements are likely to be
significantly affected, the materiality level is
A) unrestricted.
B) material.
C) pervasive.
D) risky.

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6) When a client fails to follow GAAP, the audit report can be unmodified, qualified, or adverse
depending on the materiality. What factors affect materiality that an auditor should consider?
A) the dollar amount in comparison to a base
B) if the misstatement can be measured
C) the nature of the item
D) All the above are factors an auditor should consider regarding materiality.

7) Which of the following is a correct statement regarding materiality?

A) There are well-defined guidelines that enable auditors to determine if something is material.
B) Misstatements must be compared with some benchmark before a decision can be made about
the materiality level of the failure of a company to follow GAAP.
C) Pervasiveness is not considered when comparing potential misstatements with a base or
benchmark.
D) To evaluate overall materiality, the auditor does not combine all unadjusted misstatements.

8) Management has recorded prepaid insurance as an asset in the previous year. This year, to
reduce record-keeping costs, it expenses insurance. If the amount is immaterial to the financial
statements,
A) a disclaimer opinion is issued.
B) a qualified opinion is issued.
C) a standard unmodified opinion audit report is issued.
D) no audit report can be issued.

9) The highest level of materiality exists when

A) users are likely to make incorrect decisions if they rely on the overall financial statements.
B) there has been a departure from GAAP.
C) amounts are material but do not overshadow the financial statements as a whole.
D) a scope limitation has been imposed.

10) Materiality is essential when an auditor considers his/her determination of the appropriate
report for a given set of circumstances.

11) A pervasive exception is one that affects different parts of the financial statements.

12) An item with a "psychological" effect (e.g., where the item maintains an increasing earnings
trend) is a qualitative factor that may affect the auditor's decision regarding materiality.

13) As misstatements become more pervasive, the likelihood of issuing a disclaimer rather than a
qualified opinion increases.

14) It is typically more difficult to evaluate the materiality of potential misstatements resulting
from a scope limitation than for failure to follow GAAP.

3.7 Learning Objective 3-7

1) A restriction on the scope of the auditor's examination requires

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A) a qualifying paragraph to be included in the introduction.
B) a qualifying paragraph preceding the opinion paragraph.
C) a disclaimer opinion.
D) a basis for a qualified opinion paragraph.

2) An auditor who issues a qualified opinion because sufficient appropriate evidence was not
obtained should describe the limitations in an explanatory paragraph. The auditor should also
modify the
A)
Scope paragraph Opinion paragraph Notes to the financial
statements
Yes No Yes

B)
Scope paragraph Opinion paragraph Notes to the financial
statements
No Yes Yes

C)
Scope paragraph Opinion paragraph Notes to the financial
statements
No Yes No

D)
Scope paragraph Opinion paragraph Notes to the financial
statements
Yes Yes No

3) When an auditor issues a qualified report due to a scope limitation an explanatory paragraph is
normally added. Which, if any, of the following paragraphs are also modified?
A)
Introductory Scope Opinion
Yes Yes Yes

B)
Introductory Scope Opinion
Yes Yes No

C)
Introductory Scope Opinion
No Yes No

D)
Introductory Scope Opinion
No Yes Yes

4) When a qualified or adverse opinion is issued, the qualifying paragraph is inserted

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A) between the introductory and scope paragraphs.
B) between the scope and opinion paragraphs.
C) after the opinion paragraph, as a fourth paragraph.
D) immediately after the address, as the first paragraph.

5) When the client fails to include information that is necessary for the fair presentation of
financial statements in the body of the statements or in the footnotes,
A) it is the auditor's responsibility to present the information in the audit report.
B) the auditor should issue a qualified or an adverse opinion.
C) the qualification is put in an added paragraph preceding the opinion.
D) all of the above.

6) If the financial statements include an income statement and a balance sheet but exclude the
statement of cash flows, the auditors
A) can issue an unqualified report.
B) should issue a qualified opinion due to the departure from GAAP.
C) should issue a qualified opinion because the missing statement of cash flows constitutes a
scope limitation.
D) should include the statement of cash flows, modify the report, and issue an unqualified
opinion.

7) Which of the following is incorrect concerning scope limitations?

A) If client imposed, the auditor should be concerned about the client trying to prevent discovery
of a material misstatement.
B) An unqualified opinion can result if auditors can perform alternative procedures and are
satisfied that the information is fairly stated.
C) The most common circumstance-imposed scope restriction is due to the client changing their
auditors.
D) The most common circumstance-imposed scope limitation is when the auditor is appointed
after the balance sheet date.

8) When dealing with materiality and scope limitation conditions,

A) a disclaimer of opinion must be issued.
B) it is easier to evaluate the materiality of potential misstatements resulting from a scope
limitation than for failure to follow GAAP.
C) scope limitations imposed by the client are always considered material.
D) an unqualified opinion may still be issued depending on the materiality of the scope
limitation.

9) When a pervasive scope limitation exists,

A) a disclaimer of opinion rather than a qualified opinion is generally required.
B) the auditor's responsibility paragraph is modified to indicate that the auditor was not able to
obtain sufficient appropriate evidence to express an audit opinion.
C) sections of the auditor's responsibility paragraph are eliminated to avoid stating anything that
might lead readers to believe that other parts of the financial statements might be fairly stated.
D) all of the above.

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10) When there is a scope restriction, what type of audit report can be issued?
A) unmodified opinion
B) qualification of scope and opinion
C) disclaimer of opinion
D) any of the above

11) Subsequent to the close of Spacely Sprockets fiscal year ending October 31, 2019, a major
debtor has declared bankruptcy due to a series of events. The receivable is significantly material
in relation to the financial statements, and recovery is doubtful. The debtor had confirmed the
full amount due to Spacely Sprocket at the balance sheet date. Because the account was
confirmed at the balance sheet date, Spacely refuses to disclose any information in relation to
this subsequent event. The CPA believes that all other accounts were stated fairly at the balance
sheet date. In addition, Spacely changed their method of inventory valuation from FIFO to LIFO.
This change was disclosed in Note X to the financial statements. Accordingly, what type of
opinion should be expressed?
A) unqualified with an explanatory paragraph
B) qualified due to a GAAP departure
C) qualified due to a scope limitation
D) a combination of B and C

12) For the report containing a disclaimer for lack of independence, the disclaimer is in the
A) second or scope paragraph.
B) third or opinion paragraph.
C) first and only paragraph.
D) fourth or explanatory paragraph.

13) When an adverse opinion is issued, a scope paragraph would be

A) qualified.
B) unchanged.
C) deleted.
D) expanded to identify the additional procedures which the auditor performed.

14) After the balance sheet date but prior to issuance of the auditor's report the auditor learns that
the client's facility in a foreign country has been expropriated. Management refuses to disclose
this information in a financial statement footnote or present pro-forma data as to the effect of the
event. The auditor should
A) add a footnote to the financial statements.
B) disclaim an opinion due to the client-imposed scope limitation.
C) provide the information in the report and modify the opinion.
D) issue an unqualified opinion but provide the information in the auditor report.

15) Financial statement users are typically more concerned with an unmodified report with
explanatory paragraphs than they are with a disclaimer of opinion.
16) A lack of independence will override any other scope limitations and requires a disclaimer of
opinion.

17) When a qualified opinion is issued, an explanatory paragraph is added immediately after the
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opinion paragraph to explain the nature of the qualification that affects the opinion.

18) In the case of a disclaimer due to lack of independence, the entire scope paragraph is
excluded from the report.

22) Assume you are the partner in charge of the 2019 audit of Becker Corporation, a private
company. The audit report has not yet been prepared. In each independent situation following
(1-8), indicate the appropriate action (a-g) to be taken. The possible actions are as follows:

a. Issue an unmodified opinion audit report.

b. Qualify both the scope and opinion paragraphs.
c. Qualify the opinion paragraph.
d. Issue an unmodified opinion with an explanatory paragraph.
e. Issue an unmodified opinion with revised wording (no explanatory paragraph).
f. Issue an adverse opinion.
g. Disclaim an opinion.

The situations are as follows:

________ 1. Becker Corporation carries its property, plant, and equipment accounts at current
market values. Current market values exceed historical cost by a highly material amount, and the
effects are pervasive throughout the financial statements.

________ 2. Management of Becker Corporation refuses to allow you to observe, or make, any
counts of inventory. The recorded book value of inventory is highly material.

________ 3. You were unable to confirm accounts receivable with Becker's customers.
However, because of detailed sales and cash receipts records, you were able to perform reliable
alternative audit procedures.

________ 4. One week before the end of fieldwork, you discover that the audit manager on the
Becker engagement owns a material amount of Becker's common stock.

________ 5. You relied upon another CPA firm to perform part of the audit. Although you were
the principal auditor, the other firm audited a material portion of the financial statements. You
wish to refer to (but not name) the other firm in your report.

________ 6. You have substantial doubt about Becker's ability to continue as a going concern.

________ 7. Becker Corporation changed its method of computing depreciation in 2019. You
concur with the change and the change is properly disclosed in the financial statement footnotes.

________ 8. Ten days after the balance sheet date, one of Becker's buildings was destroyed by a
fire. Becker refuses to disclose this information in a footnote to the financial statements, but you
believe disclosure is required to conform with GAAP. The amount of the uninsured loss was
material, but not highly material.

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24) In auditing the long-term investments account, Arens, CPA, is unable to obtain audited
financial statements for an investee located in a foreign country. Levine concludes sufficient
appropriate audit evidence regarding this investment cannot be obtained.

For each of the following situations below, identify the appropriate opinion type and report
modification by selecting a choice from the appropriate tables below.

Opinion Intro Scope Opinion Exp1

Situation Type
1. Assume the potential effect on
the financial statements is
immaterial.
2. Assume the potential effect on
the financial statements is
moderate.
3. Assume the potential effect on
the financial statements is high.

Opinion Type Standard Paragraph Choice Explanatory Paragraph

U Unmodified O Omit 0 None required
Q Qualified N No change + Insert before opinion
A Adverse M Modify - Insert after opinion
D Disclaimer

25) Audit situations 1 through 10 present various independent factual situations an auditor might
encounter in conducting an audit. List A represents the types of opinions the auditor ordinarily
would issue, and List B represents the report modifications (if any) that would be necessary. For
each situation, select one response from List A and one from List B. Select, as the best answer
for each item, the action the auditor normally would take. Items from either list may be selected
once, more than once, or not at all.

Assume the following:

• The auditor is independent
• The auditor previously expressed an unmodified opinion on the prior-year financial
statements unless otherwise noted
• Only single-year (not comparative) statements are presented for the current year (unless
otherwise stated)
• The conditions for an unmodified opinion exist unless contradicted in the factual scenario
• The conditions stated in the factual scenario are material
• No report modifications are to be made except in response to the factual scenario

Factual Scenario
1. The financial statements present fairly, in all material respects, the financial position, results of
operations, and cash flows in conformity with GAAP.
2. In auditing the Long-Term Investments account, an auditor is unable to obtain audited
financial statements for an investee located in a foreign country. The auditor concludes that
sufficient competent evidential matter regarding this investment cannot be obtained but it is not
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pervasive to the financials as a whole.
3. Due to recurring operating losses and working capital deficiencies the auditor has substantial
doubt about an entity's ability to continue as a going concern for a reasonable period of time.
However, the financial statement disclosures are adequate.
4. The principal auditor decides to refer to the work of another auditor, who audited a wholly
owned subsidiary of the entity and issued an unqualified opinion.
5. An entity issues financial statements that present financial position and results of operations
but omits the related statement of cash flows. Management discloses in the notes to the financial
statements that it does not believe the statement of cash flows to be useful.
6. An entity changes its depreciation method for production equipment from straight-line to units
of production based on hours of utilization. The auditor concurs with the change, although it has
a material effect on the comparability of the entity's financial statements.
7. An entity is a defendant in a lawsuit alleging infringement of certain patent rights. However,
management cannot reasonably estimate the ultimate outcome of the litigation. The auditor
believes that there is a reasonable possibility of a significant material loss, but the lawsuit is
adequately disclosed in the notes to the financial statements.
8. An entity discloses certain lease obligations in the notes to the financial statements. The
auditor believes that the failure to capitalize these leases is a departure from GAAP.
9. The entity wishes to show comparative financial statements and include the prior year.
However, the prior year financial statements contained a qualification due to an inappropriate
method of GAAP. Accordingly, management corrected the prior year GAAP deficiency and
included the updated numbers in the comparative financials for the current year.

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10. The entity wishes to show comparative financial statements and include the prior year.
However, the prior year financial statements were audited by another auditor who refuses to
reissue his opinion.

List A List B
Opinion Choices Report Modification Choices
H Describe the circumstances in an
emphasis-of-matter paragraph preceding
the opinion paragraph w/o modifying the
A Qualified three standard paragraphs.
I Describe the circumstances in the
opinion paragraph w/o adding an
B Unmodified emphasis-of-matter paragraph.
J Describe the circumstances in an
emphasis-of-matter paragraph preceding
the opinion paragraph and modify the
C Adverse opinion paragraph.
K Describe the circumstances in an
emphasis-of-matter paragraph following
the opinion paragraph and modify the
D Disclaimer opinion paragraph.
L Describe the circumstances in an
emphasis-of-matter paragraph preceding
the opinion paragraph and modify the
E Either Qualified or Adverse scope & opinion paragraph.
M Describe the circumstances in an
emphasis-of-matter paragraph following
the opinion paragraph and modify the
F Either Disclaimer or Adverse scope & opinion paragraph.
N Describe the circumstances in the
scope paragraph w/o adding an emphasis-
G Either Qualified or Disclaimer of-matter paragraph.
O Describe the circumstances in an
emphasis-of-matter paragraph following
the opinion paragraph w/o modifying the
three standard paragraphs.
P Describe the circumstances in the
introductory paragraph w/o adding an
emphasis-of-matter paragraph.
Q Describe the circumstances in the
introductory paragraph w/o adding an
emphasis-of-matter paragraph, and
. modify the scope & opinion paragraphs.
R Issue the standard auditor's report w/o
modification.
S None of the above.

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3.8 Learning Objective 3-8

1) When accounting principles are not consistently applied, and the materiality level is
immaterial, the auditor will issue a(n)
A) standard unmodified opinion.
B) unmodified opinion with an explanatory paragraph.
C) adverse opinion.
D) disclaimer opinion.

2) The first step to be followed when deciding the appropriate audit report in a given set of
circumstances is to
A) decide the appropriate type of report for the condition.
B) write the report.
C) determine whether any conditions exist requiring a departure from a standard unmodified
opinion audit report.
D) decide the materiality for each condition.

3) In most audits, the auditor issues a(n)

A) modified opinion audit report.
B) standard unmodified opinion audit report.
C) scope limited audit report.
D) adverse audit report.

4) More than one modification should be included in the audit report when
A) the auditor is not independent and the auditor knows that the company has not followed
generally accepted accounting principles.
B) there is substantial doubt about the going concern of the company and information about the
causes of the uncertainties is not adequately disclosed in the footnotes.
C) there is a scope limitation and there is substantial doubt about the company's ability to
continue as a going concern.
D) all of the above.

5) When there is a justified departure from GAAP which is considered material, the auditor
should issue a(n)
A) standard unmodified opinion.
B) disclaimer of opinion.
C) unmodified opinion with an explanatory paragraph.
D) adverse opinion.

6) If there is a deviation in the statements' preparation in accordance with GAAP and another
accounting principle was applied on a basis that was not consistent with that of the preceding
year,
A) the auditor must choose which modification to include in the audit report.
B) only the most material modification can be disclosed.
C) more than one modification should be included in the report.
D) none of the above.

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7) After the auditor determines whether any conditions exist which require a departure from a
standard unmodified opinion audit report, the next step in the decision process is to
A) write the report.
B) decide the materiality for each condition.
C) decide the appropriate type of report for the condition.
D) discuss the report with management.

8) For departures from GAAP or scope restrictions, the auditor must decide if the potential effect
on the financial statements is
A) immaterial.
B) material.
C) highly material.
D) any of the above.

9) If the scope restriction imposed by the client is so material that the overall fairness of the
financial statements is in question, the auditor should issue a(n)
A) standard unmodified opinion.
B) disclaimer of opinion.
C) adverse opinion.
D) unmodified opinion with revised wording in the scope paragraph.

10) The final step in the auditor's decision process for audit reports is to write the audit report.

11) Auditors usually make the materiality judgment by referring to a standard checklist.

3.9 Learning Objective 3-9

1) Which of the following is correct regarding IFRS?

A) Companies that are required to file their financial statements with the SEC must follow IFRS
starting in 2018.
B) Recent developments suggest that the SEC may be slowing down its efforts towards adopting
IFRS any time soon.
C) When an auditor is engaged to report on financial statements prepared in accordance with
IFRS, they must issue a qualified opinion.
D) The introductory paragraph of the audit report is modified to indicate that the audit was
conducted in accordance with International Standards on Auditing.

2) Auditing standards in the United States allow an auditor to perform an audit of a nonpublic
U.S. entity in accordance with both generally accepted auditing standards in the U.S. and the
ISAs.

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