Secion O Question Sets - 3

When an auditor expresses an adverse opinion, the opinion paragraph should include:

1. A direct reference to a separate paragraph disclosing the basis for the opinion.

2. A description of the uncertainty or scope limitation that prevents an unmodified opinion.

3. The principal effects of the departure from generally accepted accounting principles.

4. The substantive reasons for the financial statements being misleading.

1 - A direct reference to a separate paragraph disclosing the basis for the opinion.

An auditor most likely would issue a disclaimer of opinion due to:

1. Inadequate disclosure of material information.

2. An inconsistent application of a generally accepted accounting principle.

3. A material departure from a generally accepted accounting principle.

4. Management's refusal to furnish a client representation letter.

4 - Management's refusal to furnish a client representation letter.

Disclaimer = Scope limitation

Which of the following is true about modifications to the independent auditor's unmodified opinion report for a nonissuer? (Select all that apply)

1. Any modifications to the independent auditor's report result in qualified, adverse or negative assurance opinions, or a disclaimer of opinion.

2. A disclaimer of opinion and an adverse opinion both include modification to the opinion paragraph.

3. An auditor would modify different paragraphs when rendering either a qualified opinion due to a departure from GAAP or an adverse opinion due to a departure from GAAP.

4. An auditor would modify the same paragraphs when rendering either a qualified opinion due to a departure from GAAP or a qualified opinion due to a scope limitation.

2 & 4

When disclaiming an opinion because of an insufficiency of audit evidence in an audit of a nonissuer, an auditor should refer to the situation in the:

Auditor's Responsibility Paragraph: Yes/No

Notes to the financial statements: Yes/No

Yes; No

When a disclaimer of opinion is issued due to a lack of sufficient audit evidence, the lack of evidence should be disclosed in the Auditor's Responsibility paragraph and in the Basis for Disclaimer of Opinion paragraph. 

Management (and not the auditor) prepares the notes to the financial statements. The auditor therefore would not refer to this (or any other) situation in the notes to the financial statements.

An auditor may issue a qualified opinion under which of the following circumstances?

Lack of sufficient appropriate audit evidence: Yes/No

Restrictions of the scope of the audit: Yes/No

Yes; Yes

An auditor may issue a qualified opinion (or a disclaimer, depending on materiality) when there is a lack of sufficient appropriate audit evidence, or when there are restrictions on the scope of the audit.

An auditor of a nonissuer may not issue a qualified opinion when:

1. The auditor lacks independence with respect to the entity.

2. The auditor's report refers to the work of an actuary.

3. Management prevents the auditor from observing the entity's inventory.

4. The entity omits the statement of cash flows from its financial statements.

1 - The auditor lacks independence with respect to the entity.

A disclaimer of opinion should be issued when an auditor lacks independence.

When disclaiming an opinion due to a client-imposed scope limitation in an audit of a nonissuer, an auditor should indicate in a separate paragraph why the audit did not comply with generally accepted auditing standards. The auditor should also omit the:

Auditor's Responsibility paragraph: Yes/No

Opinion paragraph: Yes/No

No; No

When disclaiming an opinion because of scope limitations, the auditor should indicate in a separate paragraph(s) the reasons that the audit did not comply with GAAS. The Auditor's Responsibility paragraph is revised to mention the disclaimer, but is not omitted. The Opinion paragraph is not omitted; however it indicates that no opinion is expressed.

An auditor of a nonissuer should disclose the substantive reasons for expressing an adverse opinion in a basis for modification paragraph:

1. Following the opinion paragraph.

2. Within the notes to the financial statements.

3. Preceding the opinion paragraph.

4. Preceding the introductory paragraph.

1 - Following the opinion paragraph.

An auditor was unable to obtain audited financial statements or other evidence supporting an entity's investment in a foreign subsidiary. Between which of the following opinions should the entity's auditor choose?

1. Adverse and unmodified with an emphasis-of-matter paragraph added.

2. Qualified and adverse.

3. Qualified and disclaimer.

4. Disclaimer and unmodified with an emphasis-of-matter paragraph added.

3 - Qualified and disclaimer.

If an auditor is unable to determine whether management's estimate of the effects of future events is reasonable, and the effect of those events is believed to be material, he or she should express:

1. An unmodified opinion with an emphasis-of-matter paragraph following the opinion paragraph.

2. An unmodified opinion with no additional paragraphs.

3. A qualified opinion or an adverse opinion.

4. A qualified opinion or a disclaimer of opinion.

4 - A qualified opinion or a disclaimer of opinion.

In which of the following circumstances would an auditor not express an unmodified opinion?

1. There has been a material change between periods in accounting principles.

2. The auditor is unable to obtain audited financial statements of a consolidated investee.

3. The auditor wishes to emphasize an unusually important subsequent event.

4. Quarterly financial data required by the SEC has been omitted.

2 - The auditor is unable to obtain audited financial statements of a consolidated investee.

When a qualified opinion results from a limitation on the scope of the audit of a nonissuer, the situation should be described in:

1. Both the opinion and basis for qualified opinion paragraphs of the auditor's report.

2. The opinion paragraph of the auditor's report.

3. The basis for qualified opinion paragraph of the auditor's report.

4. The auditor's responsibility paragraph of the auditor's report.

3 - The basis for qualified opinion paragraph of the auditor's report.

When an independent CPA is associated with the financial statements of a publicly held entity but has not audited or reviewed such statements, the appropriate form of report to be issued must include a(an):

1. Qualified opinion.

2. Disclaimer of opinion.

3. Compilation report.

4. Unaudited association report.

2 - Disclaimer of opinion.

An auditor who is unable to form an opinion on a new client's opening inventory balances may issue an unmodified opinion on the current year's:

1. Balance sheet only.

2. Income statement only.

3. Statement of cash flows only.

4. Statement of shareholders' equity only.

1 - Balance sheet only.

During an audit, the auditor notes that the client's financial statements are not in conformity with GAAP regarding the recording of leases. Based on this situation, which opinion is least likely to be rendered?

1. An adverse opinion.

2. A disclaimer of opinion.

3. An unmodified opinion.

4. A qualified opinion.

2 - A disclaimer of opinion.

A disclaimer of opinion is issued when there is a significant scope limitation, when the auditor is not independent, or when the financial statements are not audited, which is not the case in this question. Disclaimers are not appropriate for GAAP issues.

Restrictions imposed by a client prohibit the observation of physical inventories, which account for 35% of all assets. Alternative audit procedures cannot be applied, although the auditor was able to examine satisfactory evidence for all other items in the financial statements. The auditor should issue a(an):

1. "Except for" qualified opinion.

2. Qualified opinion with a basis for modification paragraph.

3. Disclaimer of opinion.

4. Unmodified opinion with an explanation in an emphasis-of-matter paragraph.

3 - Disclaimer of opinion.

When qualifying an opinion because of an insufficiency of audit evidence in an audit of a nonissuer, an auditor should refer to the situation in the:

Basis for Qualified Opinion paragraph: Yes/No

Notes to the financial statements: Yes/No

Yes; No

When a qualified opinion results from a limitation on the scope of the audit or an insufficiency of audit evidence, the situation should be described in the Basis for Qualified Opinion paragraph preceding the opinion paragraph and referred to in the opinion paragraph of the auditor's report. It is not appropriate for the scope of the audit to be explained in a note to the financial statements, since the description of the audit scope is the responsibility of the auditor and not that of the client.

When an auditor of a nonissuer qualifies an opinion because of inadequate disclosure, the auditor should describe the nature of the omission in a separate paragraph and modify the:

Auditor's responsibility paragraph: Yes/No

Opinion paragraph: Yes/No

No; Yes

When an auditor of a nonissuer qualifies an opinion because of inadequate disclosure (GAAP issue), the auditor should describe the nature of the omission in a separate paragraph and modify the Opinion and Basis for Opinion paragraphs. Both Management's and Auditor's Responsibilities sections require no modification.

When qualifying an opinion due to an inability to obtain sufficient appropriate audit evidence, an auditor of a nonissuer should include the reasons for that inability to obtain sufficient information in:

Management's Responsibility paragraph: Yes/No

Basis for Qualified Opinion paragraph: Yes/No

No; Yes

When a qualified opinion results from an inability to obtain sufficient appropriate audit evidence, the situation should be described in a basis for qualified opinion paragraph preceding the opinion paragraph and should be referred to in the opinion paragraph. The scope limitation is not mentioned in the management's responsibility paragraph.

Under which of the following circumstances would the expression of a disclaimer of opinion be inappropriate?

1. The company issues financial statements that purport to present financial position and results of operations, but refuses to include the related statement of cash flows.

2. The auditor is unable to determine the extent of or the amounts associated with a pervasive employee fraud scheme.

3. The chief financial officer and the chief executive officer are unwilling to sign the management representation letter.

4. Management refuses to produce documentation verifying the ownership of its equipment and production facilities.

1 - The company issues financial statements that purport to present financial position and results of operations, but refuses to include the related statement of cash flows.

Which of the following phrases would an auditor of a nonissuer most likely include in the auditor's report when expressing a qualified opinion due to inadequate disclosure?

1. Except for the omission of the information described in the basis for qualified opinion paragraph.

2. Subject to the departure from generally accepted accounting principles, as described above.

3. With the foregoing explanation of these omitted disclosures.

4. Do not present fairly.

1 - Except for the omission of the information described in the basis for qualified opinion paragraph.

Morris, CPA, suspects that a pervasive scheme of illegal bribes exists throughout the operations of Worldwide Import-Export, Inc., a new audit client. Morris notified the audit committee and Worldwide's legal counsel, but neither could assist Morris in determining whether the amounts involved were material to the financial statements or whether senior management was involved in the scheme. Under these circumstances, Morris should:

1. Express an unmodified opinion with an other-matter paragraph.

2. Issue a special report regarding the illegal bribes.

3. Disclaim an opinion on the financial statements.

4. Express an adverse opinion on the financial statements.

3 - Disclaim an opinion on the financial statements.

Since the CPA could not determine whether the suspected illegal bribes were material to the financial statements, or whether senior management was involved in the scheme, Morris should disclaim an opinion on the financial statements.

An auditor is unable to complete a procedure during an audit. Based on this situation, which opinion is least likely to be rendered?

1. An adverse opinion.

2. A qualified opinion.

3. An unmodified opinion.

4. A disclaimer of opinion.

1 - An adverse opinion

An adverse opinion is rendered when there is a departure from GAAP, which is not the case in this question.

When an independent CPA assists in preparing the financial statements of a publicly held entity, but has not audited or reviewed them, the CPA should issue a disclaimer of opinion. In such situations, the CPA has no responsibility to apply any procedures beyond:

1. Determining whether management has elected to omit substantially all required disclosures.

2. Reading the financial statements for obvious material misstatements.

3. Documenting that internal control is not being relied on.

4. Ascertaining whether the financial statements are in conformity with GAAP.

2 - Reading the financial statements for obvious material misstatements.

When an auditor of a nonissuer qualifies an opinion because of the inability to confirm accounts receivable by direct communication with debtors, the wording of the qualified opinion paragraph of the auditor's report should indicate that the qualification pertains to the:

1. Departure from generally accepted auditing standards.

2. Possible effects on the financial statements.

3. Limitation on the auditor's scope.

4. Lack of sufficient appropriate audit evidence.

2 - Possible effects on the financial statements.

When an auditor of a nonissuer qualifies his or her opinion because of a scope limitation, such as the inability to confirm accounts receivable, the wording in the opinion paragraph should indicate that the qualification pertains to the possible effects on the financial statements and not to the scope limitation itself.

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

1. The auditor did not observe the entity's physical inventory and is unable to become satisfied as to its balance by other auditing procedures.

2. The auditor is asked to report only on the entity's balance sheet and not on the other basic financial statements.

3. Events disclosed in the financial statements cause the auditor to have substantial doubt about the entity's ability to continue as a going concern.

4. The financial statements fail to disclose information that is required by generally accepted accounting principles.

4 - The financial statements fail to disclose information that is required by generally accepted accounting principles.

Failure to disclose information that is required by GAAP is a departure from GAAP. Departures from GAAP result in a qualified or an adverse opinion.

A limitation on the scope of an audit sufficient to preclude an unmodified opinion will usually result when management:

1. Fails to correct a significant deficiency in internal control communicated to those charged with governance after the prior year's audit.

2. Refuses to disclose in the notes to the financial statements related party transactions authorized by the Board of Directors.

3. Does not provide the auditor with an engagement letter specifying the responsibilities of both the entity and the auditor.

4. Is unable to obtain audited financial statements supporting the entity's investment in a foreign subsidiary.

4 - Is unable to obtain audited financial statements supporting the entity's investment in a foreign subsidiary.

Restrictions on the scope of the audit, such as the timing of the work, the inability to obtain sufficient appropriate audit evidence, or an inadequacy in the accounting records, may require the auditor to qualify or disclaim an opinion. Inability to obtain audited financial statements supporting the entity's investment in a foreign subsidiary is such a restriction on the scope of the audit.

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 fieldwork 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(an):

1. Unmodified opinion.

2. Qualified opinion due to a departure from generally accepted auditing standards.

3. Unmodified opinion with an emphasis-of-matter paragraph.

4. Qualified opinion due to a scope limitation.

1 - Unmodified opinion.

A scope limitation sufficient to preclude an unmodified opinion always will result when management:

1. Prevents the auditor from reviewing the audit documentation of the predecessor auditor.

2. Requests that certain material accounts receivable not be confirmed.

3. Engages the auditor after the year-end physical inventory is completed.

4. Refuses to acknowledge its responsibility for the fair presentation of the financial statements in conformity with GAAP.

4 - Refuses to acknowledge its responsibility for the fair presentation of the financial statements in conformity with GAAP.

The introductory paragraph of the standard unmodified report includes a statement that the financial statements are the responsibility of the company's management. Management's refusal to accept responsibility for the fair presentation of the financial statements therefore precludes issuance of this standard report.