ACG4651 CH 3: Audit Reports SUs 15-17

15.1.1 The objective of the audit of GAAP-based financial statements is to

Express an opinion on the fairness with which the statements present financial position, results of operations, and cash flows in accordance with generally accepted accounting principles

15.1.2 Which of the following statements best describes the distinction between the auditor’s responsibilities and management responsibilities?

The auditor’s responsibility is confined to expressing an opinion, but the financial statements remain the responsibility of management

15.1.3 The evaluation of fairness in determining the appropriate opinion to express should include consideration of the qualitative aspects of the entity’s accounting practices, including whether

Indicators of possible bias exist in management’s judgements

15.1.4 Which of the following best describes why an independent auditor is asked to express an opinion on the fair presentation of financial statements?

The opinion of an independent party is needed because a company may not be objective with respect to its own financial statements

15.1.5 If a company’s’ external auditor expresses an unmodified opinion as a result of the audit of the company’s financial statements, readers of the audit report can assume that

Material issues about the application of accounting principles were resolved to the satisfaction of the external auditor

15.1.6 A major purpose of the auditor’s report on financial statements is to

Clarify for the public the nature of the auditor’s responsibility and performance

15.1.7 The securities of Donley Corporation are listed on a regional stock exchange and registered with the SEC. The management of Donley engages a CPA to perform an independent audit of Donley’s financial statements. The primary objective of this audit is to provide assurance to the 

Investors in Donley securities

15.1.8 The auditor’s judgement concerning the overall fairness of the presentation of financial position, results of operations, and cash flows is applied within the framework of

Generally accepted accounting principles

15.1.9 To which of the following material asset balances should an auditor object as not in accordance with U.S. GAAP?

Increase in goodwill resulting from annual testing

15.1.10 A closely held manufacturing company must disclose all of the following information in audited financial statements except

Replacement cost of inventory 

15.1.11 Patentex developed a new secret formula that is of great value because it resulting in a virtual monopoly. Patentex has capitalized all research and development costs associated with this formula. Greene, CPA, who is auditing this account, will probably 

Confer with management regarding transfer of the amount from the balance sheet to the income statement

15.1.12 A client owning 18% of the voting stock of an investee has accounted for the investment under the equity method. The effect of using the equity method rather than the fair value method is material. In this instance, 

Because an interest of less than 20% implies that the investor cannot exercise significant influence over the investee, the auditor will need to obtain evidence to support a claim to the contrary

15.1.13 If financial statements are to meet the requirements of adequate disclosure 

All information believed by the auditor to be essential to the fair presentation of the financial statements must be disclosed, no matter how confidential management believes the data to be

15.1.14 Adequate disclosure means that sufficient information is presented so that financial statements are not misleading. The decisions about adequate disclosure should reflect the needs of

Users with a reasonable knowledge of business

15.1.15 The financial statements of a nonissuer include a separate statement of changes in equity. This statement should

Be identified separately in the opinion section of the auditor’s report

15.1.16 Which of the following statements is false regarding disclosure in a client’s GAAP-based financial statements?

The auditor should never disclose information in the report that the client has not shown in the financial statements

15.1.7 Notes to financial statements may be used to

Indicate bases for measuring assets

15.1.18 If the auditor discovers that the fair value of a client’s investments in trading securities has increased, the auditor of the GAAP-based financial statements should insist that the

Holding gain be recognized in the financial statements of the client

15.1.19 Late in December, Tech Products Company sold available-for-sale securities that had appreciated in value and then repurchased them the same day. The sale and purchase transactions resulted in a large gain. Without the gain, the company would have reported a loss for the year. Which statement with respect to the auditor is true?

If the sale and repurchase are disclosed, an unmodified opinion should be expressed

15.2.1 The auditor’s report refers to the U.S. GAAP based financial statements, which are customarily considered to include the balance sheet and the statements of 

Income, changes in equity, and cash flows

15.2.2 An auditor’s client is a nonprofit organization. U.S. GAAP for this type of nonprofit organization have been clearly defined, and the client has following such practices. The preferred method of reporting on the client’s adherence to such practices is to

Use the phrase “In accordance with accounting principles generally accepted in the United States of America” in the opinion paragraph

15.2.3 A United States auditor of a nonissuer is aware that the report on the financial statements will be available on the Internet to parties outside the United States. In the auditor’s report, how should the auditor refer to the country of origin of the accounting principles used to prepare the financial statements?

In the management’s responsibility for the financial statements and opinion sections

15.2.4 Without affecting the CPA’s willingness to express an unmodified opinion on the client’s U.S. GAAP based financial statements, corporate management may refuse a request to

Change its basis of accounting for inventories from FIFO to LIFO because, in the opinion of the CPA, the FIFO method fails to give adequate recognition to the extraordinarily increases in prices in merchandise acquired and held by the company

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

Unmodified opinion

15.2.6 A client makes test counts on the basis of a statistical plan. The auditor observes such counts as are deemed necessary and is able to become satisfied as to the reliability of the client’s procedures. In reporting on the result of the audit, the auditor

Can express and unmodified opinion

15.2.7 A note to the financial statements of the First Security Bank indicates that all of the records relating to the bank’s business operations are stores on magnetic disks and that no emergency backup systems or duplicate disks are stored because the bank and its auditors consider the occurrence of a catastrophe to be remote. Based upon this note, the auditor’s report on the financial statements should express 

An unmodified opinion

15.2.8 If the auditor obtains satisfaction with respect to the accounts receivables balance by alternative procedures because its is impracticable to confirm accounts receivable, the auditor’s report should be unmodified and could be expected to

Not mention the alternative procedures

15.2.9 An external auditor discovers that a payroll supervisor of the firm being audited has misappropriated $10,000. The firm’s