Test Bank Answers Reporting on the Audit Chapter 15 1e

Chapter 15

Reporting on the Audit

Question Type: True or False

The auditor’s report can be in writing or it can be expressed orally.

A. True

B. False

If the client has a going concern issue, then management must make a note disclosure about the circumstances, including any plans management may have to mitigate the situation.

A. True

B. False

A component auditor, which is a different accounting firm, may audit a component or subsidiary of the parent company.

A. True

B. False

Characteristics of a pervasive misstatement or scope limitation include that is it not confined to specific elements, accounts, or items of the financial statements.

A. True

B. False

If the subsidiary ‘s financial statements audited by the component auditor is a material amount of the group financial statements, the group engagement partner typically decides to reference the work completed by the component auditor in the audit report.

A. True

B. False

An unmodified opinion is expressed by the auditor when the auditor concludes the financial statements are presented fairly, in all material respects.

A. True

B. False

An emphasis of matter paragraph is mandatory for all audit reports.

A. True

B. False

Companies typically present their financial statements in comparative form, which means showing two consecutive years of balance sheets and three consecutive years of the income statement, statement of cash flows, and statement of stockholders’ equity.

A. True

B. False

An immaterial misstatement occurs when the client departs from the applicable financial reporting framework.

A. True

B. False

A scope limitation occurs when auditors are able to perform planned audit procedures to gather sufficient appropriate evidence.

A. True

B. False

Whether auditors choose to dual date or extend the end of fieldwork, they must request written representation from management as of the new date of the auditor's report.

A. True

B. False

The concept of materiality is NOT an important factor in determining which type of modified report to issue.

A. True

B. False

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements.

A. True

B. False

The auditor should consider modifying the opinion if the management refuses to sign the updated representation letter.

A. True

B. False

Auditors of public companies can perform an integrated audit, which means performing the financial statement audit and the audit of the effectiveness of the internal control over financial reporting (ICFR) at the same time.

A. True

B. False

Adverse opinions on the effectiveness of internal control over financial reporting (ICFR) are frequently issued for large, well-established companies.

A. True

B. False

In a compilation engagement, the CPA will assist management in the presentation of financial statements and will provide assurance as to whether the financial statements are presented fairly in accordance with the applicable financial reporting framework.

A. True

B. False

To provide limited assurance, the CPA must perform procedures to gather evidence that no material modifications are needed for the financial statements to be in accordance with the financial reporting framework.

A. True

B. False

Question Type: Multiple choice

An unmodified opinion is expressed by_______.

A. the internal audit function upon concluding the financial statements are fairly represented

B. the external auditor when the auditor concludes the financial statements are presented fairly, in all material respects

C. the external auditor when the auditor concludes the financial statements are presented fairly, in all material and immaterial respects

D. management when the auditor concludes the financial statements are presented fairly, in all material respects

The responsibility for the financial statements rests_______.

A. jointly with the auditor and management

B. solely with management

C. with the internal audit function

D. solely with the external auditor

The purpose of an audit is to _______.

A. provide financial statement users with an opinion by an independent auditor on whether the financial statements are presented fairly in accordance with an applicable financial reporting framework

B. provide internal auditors with an opinion by the external auditor on whether the financial statements are presented fairly in accordance with an applicable financial reporting framework

C. provide absolute assurance that the financial statements conform to Generally Accepted Accounting Principles (GAAP)

D. help management ensure yearly bonuses will be received

The audit process _______.

A. can typically take up to a year

B. is aimed primarily at creditors

C. enhances the degree of confidence that intended users place in the financial statements

D. decreases the degree of confidence that intended users place in the financial statements

Once auditors have gathered sufficient appropriate audit evidence, evaluated uncorrected misstatements, and completed the required communications with those charged with governance _______.

A. the final step is to prepare and issue the independent auditor’s report

B. the final step is to confer with the client's legal counsel

C. the audit report should be sent to the internal audit function for review

D. the report should be sent to the SEC for modification and approval

AU-C 700 Forming an Opinion and Reporting on Financial Statements defines an unmodified opinion as the opinion expressed by the_______.

A. internal auditor when the auditor concludes the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework

B. external auditor when the auditor concludes the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework

C. external auditor when the auditor concludes the financial statements are presented fairly, in all material and immaterial respects, in accordance with the applicable financial reporting framework

D. external auditor when the auditor concludes the financial statements are presented fairly, in all material respects, in accordance with the international financial reporting standards

The audit process _______.

A. enhances the degree of confidence that intended users place in the financial statements

B. has no effect on the degree of confidence that intended users place in the financial statements

C. decreases the degree of confidence that intended users place in the financial statements

D. is unrelated to the degree of confidence that intended users place in the financial statements

The audit report represents the _______.

A. beginning of the audit process

B. “end product” of the financial statement audit

C. “end product” of the internal audit review and audit

D. opinion of management with respect to the fairness and accuracy of the financial statements

Audit reports tend to be _______.

A. very different, depending on the company being audited

B. fairly standard with respect to wording and paragraphs

C. standard for companies within an industry, but varying between industries

D. very different, with respect to wording and paragraphs

The auditor’s responsibility, as expressly stated in the audit report, is to _______.

A. express an opinion on the financial statements

B take responsibility for the financial statements

C. make it clear that responsibility for the financial statements rests with the internal audit function

D. make it clear that responsibility for the financial statements rests with the client's legal counsel

In the audit report, the auditor states that another party is responsible for the preparation of the financial statements. This party is _______.

A. the internal auditor

B. the client's legal counsel

C. management

D. the SEC

A/an _______ is presented by the auditor to indicate that the financial statements are in accordance with the applicable financial reporting framework.

A. unmodified opinion

B. modified opinion

C. unqualified opinion

D. audit opinion

Which of the following is NOT a component of unmodified opinion for a private company audit?

A. Auditor tenure

B. Title

C. Opinion paragraph

D. Introductory paragraph

An emphasis-of-matter paragraph refers to when an auditor_______.

A. issues an unmodified opinion but may include an additional paragraph in the report to draw attention to important information

B. issues a disclaimer of opinion due to a scope limitation

C. makes inquiries of the prior auditor relating to prior audit opinions issues

D. makes inquiries of the legal auditor relating to prior audit opinions issues

If an auditor wishes to draw attention to important information that is already presented or disclosed in the financial statements, the auditor would include a _______.

A. qualified opinion

B. disclaimer of opinion

C. emphasis-of-matter paragraph

D. scope limitation paragraph

The emphasis-of-matter paragraph is _______.

A. placed after the opinion paragraph in the standard unmodified report.

B. placed before the opinion paragraph in the standard unmodified report.

C. placed with the opinion paragraph in the standard unmodified report.

D. referred to in a separate report

If the client has a going concern issue, _______.

A. then management must make a note disclosure about the circumstances, including any plans management may have to mitigate the situation

B. then the internal auditors must make a note disclosure about the circumstances, including any plans management may have to mitigate the situation

C. then the external auditors must make a note disclosure about the circumstances, including any plans management may have to mitigate the situation

D. the auditor should recommend that management begin the liquidation process to dissolve the firm

With respect to management’s disclosure required for going concern issues, _______.

A. if management determines that the disclosure is fairly presented in accordance with the applicable financial reporting framework, then an unmodified auditor’s report can still be issued

B. if auditors determine that the disclosure is fairly presented in accordance with the applicable financial reporting framework, then an unmodified auditor’s report can still be issued

C. the auditor should advise management that they are now unable to issue an unmodified audit opinion

D. the auditor should advise management that they are now unable to issue a modified audit opinion

An unmodified auditor’s report is _______.

A. an indication that a firm is financially successful

B. an indicator that the firm’s stock price may be about to drop

C. not an indication the company is successful financially, but rather an indication the company has followed accounting standards as dictated by the applicable financial reporting framework

D. an indication the company is successful financially, but not an indication the company has followed accounting standards as dictated by the applicable financial reporting framework

When a client has a going concern issue, _______.

A. AU-C 570 The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern requires an emphasis-of-matter paragraph be added to the unmodified report, after the opinion paragraph

B. AU-C 570 The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern requires an emphasis-of-matter paragraph be added to the unmodified report, before the opinion paragraph

C. the auditor must notify the Securities and Exchange Commission (SEC) within ten business days

D. the auditor should recommend a potential acquirer

Companies typically present their financial statements _______.

A. to show the most recent year only

B. in comparative form, which means showing two consecutive years of balance sheets and three consecutive years of the income statement, statement of cash flows, and statement of stockholders’ equity

C. in standard form, which means showing three consecutive years of balance sheets and three consecutive years of the income statement, statement of cash flows, and statement of stockholders’ equity

D. only to those entities who have expressed an interest in scrutinizing them

Showing comparative financial statements helps users _______.

A. to calculate a definite future stock price

B. to analyze the company’s financial condition and profitability

C. spot potential problems in the most recent years note disclosures

D. understand the difference between basic and diluted earnings per share

Which of the following paragraphs is placed after the opinion paragraph in the standard unmodified report, when applicable?

A. Emphasis-of-matter paragraph

B. Scope paragraph

C. Opinion paragraph

D. Auditor’s responsibility paragraph

Define the emphasis of matter paragraph.

A. A paragraph included in the auditor’s report that is required by generally accepted auditing standards or is included at the auditor’s discretion.

B. A paragraph that identifies the statements being audited and states the auditor’s opinion.

C. A paragraph that states responsibilities and references registration with the Public Company Accounting Oversight Board (PCAOB).

D. A paragraph that briefly explains the process of conducting an audit and that the PCAOB standards were followed.

Which of the following is NOT a situation in which the auditor wants to draw users’ attention to a material matter that is already presented and/or disclosed in the client’s financial statements?

A. A major disaster that may not have a significant impact on the company’s financial situation

B. Uncertainties relating to the future outcome of litigation

C. Significant subsequent events

D. Material transactions with related parties

The group engagement partner typically decides to reference the work completed by the component auditor in the audit report _______.

A. when management requests that the audit firm do so

B. when the subsidiary audited by the component auditor is a material amount of the group financial statements

C. when the subsidiary audited by the component auditor is an immaterial amount of the group financial statements

D. when the group auditor requests the inclusion of their firm on the audit report

The group engagement team _______.

A. audits the parent company and is responsible for the overall audit strategy for all of the components

B. audits the subsidiary company and is responsible for the overall audit strategy for all of the components

C. has no responsibility for issuing an audit opinion

D. is responsible for the fairness of the financial statements

A component auditor is typically_______.

A. another audit partner in the same office

B. a different partner at a different office of the same firm

C. a different accounting firm that audits a component or subsidiary of the parent company

D. a different accounting firm that audits a component of the subsidiary company

It is the responsibility of the group engagement partner to_______.

A. ensure the work completed by a component auditor meets the group engagement partner’s requirements and standards.

B. ensure the financial statements are free from error

C. ensure the work completed by a prior auditor meets the group engagement partner’s requirements and standards

D. notify the appropriate supervisor of fraud being committed at the next level of management up from the individual

The group engagement partner _______.

A. shares joint responsibility with management for the fairness and accuracy of the financial statements

B. has sole responsibility for the fairness and accuracy of the financial statements

C. must decide whether to refer to the audit of a component auditor in the auditor’s report on the group financial statements

D. must decide whether to refer to the audit of a prior auditor in the auditor’s report on the group financial statements

When reference is made to a component auditor, _______.

A. the auditor’s responsibility paragraph is modified to indicate the portion of the group financial statements that were audited by the component auditor

B. the auditor’s responsibility paragraph is removed, and reference is made to the group financial statements that were audited by the component auditor

C. liability for the fairness of the financial statements is transferred accordingly

D. inherent risk will decrease accordingly

The portion of the consolidated financial statements audited by the component auditor _______.

A. is expressed in dollar amounts only

B. must be expressed in terms of percentages of total assets only

C. can be expressed in dollar amounts or percentages of total assets, total revenues, or other appropriate criteria

D. should not be relied on to the same extent as the group auditor

If more than one component auditor was used to audit multiple subsidiaries, _______.

A. then the audit report should not be relied upon

B. then the portion of the client audited by all component auditors can be aggregated together and expressed as one-dollar amount or percentage

C. then the portion of the client audited by all prior auditors can be aggregated together and expressed as one-dollar amount or percentage

D. control risk will increase accordingly

If the group engagement partner wants to name the component audit firm, then_______.

A. he/she must receive permission from the component auditor, and the component auditor’s report on the subsidiary must be presented together with the auditor’s report on the group financial statements

B. he/she must receive permission from the component auditor, and the prior auditor’s report on the subsidiary must be presented together with the auditor’s report on the group financial statements

C. he or she is free to do so

D. management must provide permission accordingly

When is a disclaimer of opinion issued?

A. When a scope limitation is material and pervasive

B. When a scope limitation is materia

l but not pervasive

C. When a misstatement is material and pervasive

D. When scope limitation is eliminated by alternative procedures

Which of the following types of auditors perform audits of a component or subsidiary of the parent company?

A. Component auditor

B. Subsidiary auditor

C. Individual auditor

D. Auditing firm

When reference is made to a component auditor, which of the following paragraphs is modified to include the portion of the group financial statements that were audited by the component auditor?

A. Auditor’s responsibility paragraph

B. Scope paragraph

C. Going concern paragraph

D. Emphasis-of-the-matter paragraph

Engagement of a component auditor requires an emphasis-of-a-matter paragraph?

A. True

B. False

When a client has a going concern issue, .AU-C 570 The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern requires an _______.

A. emphasis-of-matter paragraph be added to the unmodified report, before the opinion paragraph

B. an emphasis-of-matter paragraph be added to the unmodified report, after the opinion paragraph

C. an explanatory paragraph be added to the unmodified report, after the opinion paragraph

D. an explanatory paragraph be added to the unmodified report, before the opinion paragraph

Companies typically present their financial statements in comparative form, which means showing ______.

A. three consecutive years of balance sheets and four consecutive years of the income statement, statement of cash flows, and statement of stockholders’ equity

B. two consecutive years of balance sheets and two consecutive years of the income statement, statement of cash flows, and statement of stockholders’ equity

C. the last fiscal year’s balance sheet income statement, statement of cash flows, and statement of stockholders’ equity

D. two consecutive years of balance sheets and three consecutive years of the income statement, statement of cash flows, and statement of stockholders’ equity.

An auditor issues a modified audit opinion when the auditor _______.

A. concludes the financial statements are not presented fairly in accordance with the applicable financial reporting framework because of one or more material misstatements

B. concludes the financial statements are not presented fairly in accordance with the applicable financial reporting framework because of one or more immaterial misstatements

C. is able to gather sufficient appropriate audit evidence to draw a conclusion as to the fair presentation of the financial statements

D. is not able to gather sufficient appropriate audit evidence to draw a conclusion about the unfair presentation of the financial statements

A key factor in determining which type of modified report to issue is _______.

A. objectivity

B. independence

C. materiality

D. existence

In regard to subsequent facts, the auditor _______.

A. has no responsibility

B. is responsible for making reasonable efforts to detect any material subsequent facts

C. is responsible for making reasonable efforts to detect any immaterial subsequent facts

D. is only responsible for material events occurring before the balance sheet date

If a misstatement is considered material, _______.

A. it should have no bearing on financial statement users and the decisions they make

B. it could affect decisions that users make if the users are made aware of the misstatement

C. it should not affect decisions that users make if the users are made aware of the misstatement

D. an auditor should immediately issue an adverse opinion

If a scope limitation is material, _______.

A. auditors cannot state a conclusion without evidence to support the conclusion

B. auditors should state a conclusion even without evidence to support the conclusion

C. it is of no relevance to the financial statements and their users

D. the auditor should immediately withdraw from the engagement

Characteristics of a pervasive misstatement or scope limitation are as follows:

A. It is not confined to specific elements, accounts, or items of the financial statements

B. If it is confined, it represents or could represent a substantial portion of the financial statements

C. In the context of disclosures, it is fundamental to users’ understanding of the financial statements

D. All of these answer choices are correct

• • It is not confined to specific elements, accounts, or items of the financial statements.
  • If it is confined, it represents or could represent a substantial portion of the financial statements.
  • In the context of disclosures, it is fundamental to users’ understanding of the financial statements (AU-C 705.06).

Auditors must use their professional judgment _______.

A. to distinguish if a misstatement or scope limitation is just material or pervasively material

B. to distinguish if a misstatement or scope limitation is just immaterial or pervasively material

C. to determine if the firm has the ability to pay the auditor for services rendered

D. in selecting the client's audit committee

With respect to the issuance of an audit report, the level of materiality will determine_______.

A. how much the auditor charges for services rendered

B. which modified opinion should be issued, if any

C. which unmodified opinion should be issued

D. which type of adverse opinion should be issued

Material misstatements discovered during the audit _______.

A. are a basis for the auditor to immediately issue a scope limitation

B. are discussed with the client's legal counsel only, and usually they make the recommended adjustment to correct the misstatement

C. are discussed with management, and usually management makes the recommended adjustment to correct the misstatement

D. require a note disclosure in the financial statements

A material misstatement occurs when _______.

A. management incorrectly calculate profitability ratios

B. the client departs from the applicable financial reporting framework

C. the client abides with the applicable financial reporting framework

D. the auditor does not receive the agreed upon compensation from the firm

The date of the auditor's report should be the _______.

A. same date as the financial statement date

B. date of the completion of fieldwork

C. date the audit report is sent to the SEC for approval

D. date the auditor receives the audit report from the internal auditors

AU-C 560 and AS 2905 state the first step when responding to subsequently discovered facts is to_______.

A. discuss the matter with the appropriate level of management and, if appropriate, those charged with governance

B. discuss the matter with the appropriate level of management rather than those charged with governance

C. issue a disclaimer of opinion, to avoid liability

D. immediately notify the board of directors, and request the internal audit function investigate accordingly

If management revises the financial statements due to subsequently discovered facts, auditors should_______.

A. perform no further audit procedures on the changes made by management

B. perform audit procedures on the changes made by management

C. always issue a qualified opinion with respect to the changes

D. issue a scope limitation, even if they are able to audit the changes

Performing audit procedures after the end of fieldwork _______.

A. has no impact on the date of the audit report

B. automatically extends the date of the audit report by 90 days

C. automatically extends the date of the audit report by 30 days

D. impacts the dating of the audit report

Dual dating refers to when the auditor _______.

A. shows two dates on the same audit report

B. shows two dates on two different audit reports

C. references last year's audit report concurrently with the current year report

D. also includes the date that the internal control function issued their audit opinion

Whether auditors choose to dual date the audit report, or extend the end of fieldwork, _______.

A. their liability with respect to the financial statements remains the same

B. they must request written representation from management as of the new date of the auditor's report

C. they must request written representation from the internal auditors as of the new date of the auditor's report

D. no further representations should be requested of management

If the auditor’s opinion on the revised financial statements is different from the previously issued audit report, _______.

A. a disclaimer of opinion should be issued

B. a scope limitation should be issued

C. then an emphasis-of-matter paragraph should be added to the revised audit report after the opinion paragraph.

D. then a management opinion paragraph should be added to the revised audit report after the opinion paragraph

An emphasis-of-matter paragraph in regards to revised financial statements should include _______.

A. the date of the auditor’s previous report

B. the type of opinion previously expressed

C. the key reasons for a different opinion, if there are two different opinions

D. all of these answer choices are correct

An example of a scenario which would cause the auditors to modify the opinion on internal control would be _______.

A. hiring of a new Chief Operating Officer

B. there is a restriction on the scope of the auditor’s work

C. there is a restriction on the scope of the prior auditor’s work

D. certain analytical procedures conducted yield expected results

(1) One or more material weaknesses in ICFR is/are identified, or

(2) There is a restriction on the scope of the auditor’s work.

A/an _______ is an event that occurs between the date of the financial statements and the date of the auditor's report.

A. subsequent event

B. dual event date

C. auditor’s report event

D. financial event

Whether auditors choose to dual date or extend the end of fieldwork, they must obtain a/an _______ from management.

A. written representation letter

B. management representation letter

C. auditing representation letter

D. auditor’s report date letter

If the auditor’s opinion on the revised financial statements is different from the previously issued audit report, then a/an _______ should be added to the revised audit report. 

A. emphasis-of-matter paragraph

B. going concern paragraph

C. auditor’s responsibility paragraph

D. opinion paragraph

An integrated audit is defined as _______.

A. an audit of a client’s financial statements

B. an audit of a client's system of internal control

C. performing the financial statement audit and the audit of the effectiveness of internal control over financial reporting (ICFR) at the same time

D. both the external and internal auditors performing the financial statement audit

According to PCAOB AS 2201, _______.

A. publicly traded companies are required to have an audit of the effectiveness of internal control over financial reporting (ICFR)

B. privately traded companies are required to have an audit of the effectiveness of internal control over financial reporting (ICFR)

C. companies should provide clear note disclosures for any change in inventory method

D. companies should clearly disclose which financial investments are being accounted for at fair value

An integrated audit refers to _______.

A. integrating the opinion of the prior auditor into the current year audit

B. allowing the firm's legal counsel to amend the audit report as they see fit

C. performing the financial statement audit and the audit of the effectiveness of internal control over financial reporting (ICFR) at the same time

D. only auditing the financial statements, with no procedures extended to the system of internal control

If an internal control exception is identified, the auditor_______.

A. must use their professional judgment to determine if the exception is a control deficiency, a significant deficiency, or a material weakness

B. must use published frameworks to determine if the exception is a control deficiency, a significant deficiency, or a material weakness

C. should notify the Securities and Exchange Commission (SEC) within 14 days

D. should consider withdrawing from the engagement

When a material weakness is identified, the auditor should _______.

A. presume that a material misstatement exists in the financial statements

B. not presume that a material misstatement occurred in the financial statements

C. immediately request the internal audit function conduct a full review of the control issue

D. proceed with issuing an unmodified opinion

Adverse opinions on the effectiveness of internal control are_______.

A. commonplace among larger companies

B. rare for large, well-established companies

C. never seen in practice

D. routinely seen in practice

When an adverse opinion is issued regarding internal control over financial reporting (ICFR), the auditor_______.

A. opines that the company has fairly reported its financial statements in accordance with Generally Accepted Accounting Principles (GAAP)

B. makes a clear statement that the company has not maintained effective internal control for the period under audit

C. makes a clear statement that the company has maintained effective internal control for the period under audit

D. is not entitled to receive full compensation for services rendered during the audit

A material weakness in internal control over financial reporting (ICFR) is defined as _______.

A. a deficiency, or a combination of deficiencies, in internal control over financial reporting

B. a single deficiency in internal control over financial reporting

C. multiple deficiencies in internal control over financial reporting

D. any account balance that the auditor has concluded is incorrect by more than a predetermined percentage

A scope limitation in regards to and audit of internal control over financial reporting (ICFR) occurs when the auditors_______.

A. are able to audit all of a client's accounts without issue

B. cannot perform planned procedures to gather sufficient appropriate evidence regarding the design and effectiveness of a client's internal controls

C. cannot perform planned procedures to gather sufficient appropriate evidence regarding the design and effectiveness of a client's financial statements

D. have not been prepaid for audit services, and is unable to collect the associated receivable

Auditors of public companies can perform a/an _______, which means performing the financial statement audit and the audit of the effectiveness of internal control over financial reporting (ICFR) at the same time.

A. integrated audit

B. internal audit

C. compliance audit

D. investigative audit

Which component of an unqualified opinion defines the concept of internal control over financial reporting (ICFR) and states inherent limitations of ICFR?

A. Definition and inherent limitations paragraph

B. Paragraph referencing the financial statement audit

C. Scope paragraph

D. Basis for opinion paragraph

The purpose of an audit is to provide_______.

A. financial statement users with an opinion by an independent auditor on whether the financial statements are presented fairly in accordance with an applicable financial reporting framework

B. internal auditors with an opinion by the independent auditor on whether the financial statements are presented fairly in accordance with an applicable financial reporting framework

C. management with assurance that they will be able to maximize profit and bonuses

D. absolute assurance that the financial statement conform to GAAP

When an adverse opinion is issued regarding internal control over financial reporting (ICFR), the auditor _______.

A. maintains that the company has fairly reported its financial statements in accordance with Generally Accepted Accounting Principles (GAAP)

B. makes a clear statement that the company has not maintained effective internal control for the period under audit

C. makes a clear statement that the company has maintained effective internal control for the period under audit

D. is not entitled to receive full compensation for services rendered during the audit

A compilation engagement is _______.

A. an audit of the financial statements, whereby an auditor expresses an opinion on the financial statements

B. an audit of the system of internal control, whereby an auditor expresses an opinion on the system of internal control

C. when an accounting firm assists management in the presentation of financial statements but does not audit, review, nor provide assurance as to whether the financial statements are presented fairly.

D. when an audit firm assists management in the presentation of financial statements and attempts to provide assurance as to whether the financial statements are presented fairly

In a compilation engagement, _______.

A. an internal auditor reviews the client firm’s filings with the Securities and Exchange Commission (SEC) for compliance and accuracy

B. the CPA will assist management in the presentation of financial statements and will provide assurance as to whether the financial statements are presented fairly in accordance with the applicable financial reporting framework

C. the CPA will assist management in the presentation of financial statements but will not provide assurance as to whether the financial statements are presented fairly in accordance with the applicable financial reporting framework

D. the current and prior auditors will jointly determine the fairness and conformity of a client's financial statements

A compilation engagement would be described as _______.

A. a non-attest service

B. an attest service

C. an audit engagement

D. an assurance service

AR-C 80, Compilation Engagements _______.

A. provides guidance on materiality thresholds

B. assists the auditor with respect to fee arrangements

C. provides guidance for the performance of a compilation engagement

D. provides guidance for the performance of an audit engagement

At the conclusion of a compilation engagement, _______.

A. the auditor provides a verbal report to management only

B. the auditor attests to the accuracy and fairness of the financial statements

C. the CPA provides a written compilation report to the client

D. the auditor uses the compilation report to assist the client in raising funds in capital markets

A review engagement _______.

A. comes under the umbrella of non-attest services

B. comes under the umbrella of assurance services

C. is an attest engagement performed on the financial statements of a private company client

D. is virtually identical to an audit of a client's financial statements

In which of the following engagements does the CPA provides limited assurance that no material modifications should be made to the financial statements for them to be in accordance with the applicable financial reporting framework?

A. Review engagement

B. Compilation engagement

C. Audit engagement

D. Material engagement

In a financial statement audit, which level of assurance provides that no material modifications should be made to the financial statements for them to be in accordance with the applicable financial reporting framework?

A. Reasonable assurance

B. Limited assurance

C. No assurance

D. None of the answers are correct.

Question Type: Text Entry

An audit involves performing _______ to obtain audit evidence about the amounts and disclosures in the consolidated financial statements.

Procedures | procedures

The purpose of a/an _______ is to provide financial statement users with an opinion by an independent auditor on whether the financial statements are presented fairly in accordance with an applicable financial reporting framework.

audit

If a change in accounting principle has a material effect on the comparability of the financial statements, then AU-C 708 requires auditors to add an_______ paragraph to the auditor’s report.

emphasis-of-matter

It is the responsibility of the _______ to ensure that the work completed by a component auditor meets the auditing requirements and standards.

group engagement partner

When the auditor cannot complete some portion of the planned audit procedures, this is referred to as _______.

scope limitation

A company’s internal control over financial reporting is a _______ designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes.

Process | process

If auditors determine that one or more material weaknesses exist in an audit of internal control over financial reporting (ICFR) they must issue a/an _______ on the effectiveness of ICFR.

adverse opinion

Question Type: Drop down

In the given table, match the terms related to an audit report on the left with their details on the right.

A. Title of an unmodified opinion

||It must include the terms “registered” and “independent.”

B. Opinion paragraph of an unmodified opinion

||It identifies the statements being audited and states the auditor’s opinion.

C. Scope paragraph of an unmodified opinion

||It briefly explains the process of conducting an audit and that the Public Company Accounting Oversight Board (PCAOB) standards were followed.

D. Audit

||It involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements.

Solution:

The title of an unmodified opinion must include the terms “registered” and “independent.”

The opinion paragraph of an unmodified opinion identifies the statements being audited and states the auditor’s opinion.

The scope paragraph of an unmodified opinion briefly explains the process of conducting an audit and that the PCAOB standards were followed.

Audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial reports.

In the given table, match the concepts related to an audit report on the left with their details on the right.

A. Emphasis-of-matter paragraph

||It is of such importance that it is fundamental to users’ understanding of the financial statements.

B. Reporting standards

||They are quite similar for private and public company audits.

C. Going concern issue with a client

||It requires emphasis-of-matter paragraph to be added to the unmodified report, after the opinion paragraph.

D. Core concept in accounting

||It requires accounting principles to be applied consistently from one accounting period to the next.

Solution:

The emphasis-of-matter paragraph is of such importance that it is fundamental to users’ understanding of the financial statements.

Reporting standards are quite similar for private and public company audits.

A going concern issue with a client requires emphasis-of-matter paragraph to be added to the unmodified report, after the opinion paragraph.

A core concept in accounting requires accounting principles to be applied consistently from one accounting period to the next.

In the given table, match the concepts related to the audit report on the left with their details on the right.

A. Not referencing the component auditor in the audit report

||It means the group engagement partner is assuming responsibility for the work of the component auditor.

B. Principal auditor

||It refers to the firm of the group engagement team.

C. Group engagement team

||It is responsible for the overall audit strategy for all of the components.

D. Audit

||It involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements.

Solution:

Not referencing the component auditor in the audit report means the group engagement partner is assuming responsibility for the work of the component auditor.

A principal auditor refers to the firm of the group engagement team.

A group engagement team is responsible for the overall audit strategy for all of the components.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements.

In the given table, match the terms related to audit opinion on the left with their details on the right.

A. Pervasive

||It is a description of the impact or possible impact of a material misstatement or material scope limitation on the financial statements as a whole.

B. Qualified opinion

||It is issued if a misstatement is material but not pervasive.

C. Adverse opinion

||It is issued when the auditors state the financial statements are not fairly presented due to a pervasively material departure from the applicable financial reporting framework.

D. Disclaimer of opinion

||It is issued if a scope limitation is material and pervasive.

Solution:

Pervasive is a description of the impact or possible impact of a material misstatement or material scope limitation on the financial statements as a whole.

A qualified opinion is issued if a misstatement is material, but not pervasive.

An adverse opinion is issued when the auditors state the financial statements are not fairly presented due to a pervasively material departure from the applicable financial reporting framework.

A disclaimer of opinion is issued if a scope limitation is material and pervasive.

In the given table, match the concepts related to the auditor’s report on the left with their details on the right.

A. Subsequently discovered fact

||It is a fact that becomes known to the auditor after the date of the auditor’s report.

B. Date of auditor's report

||It is the date of the completion of fieldwork.

C. Dual dating

||It shows two dates on an audit report; one date is the end of fieldwork and the other is the date of a revision to the financial statements that occurred after the end of fieldwork.

D. Written representation letter

||It must be obtained when auditors choose to extend the end of fieldwork.

Solution:

A subsequently discovered fact is a fact that becomes known to the auditor after the date of the auditor’s report.

The date of auditor's report is the date of the completion of fieldwork.

Dual dating shows two dates on an audit report; one date is the end of fieldwork and the other is the date of a revision to the financial statements that occurred after the end of fieldwork.

A written representation letter must be obtained when auditors choose to extend the end of fieldwork.

In the given table, match the concepts related to the auditor’s report on the left with their details on the right.

A. A company’s internal control over financial reporting (ICFR)

||It is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes.

B. Material weakness

||It is a deficiency, or a combination of deficiencies, in internal control over financial reporting.

C. Scope limitation

||It occurs when auditors cannot perform planned procedures to gather sufficient appropriate evidence regarding the design and effectiveness of a client's internal controls.

D. Disclaimer of opinion

||It states that the auditor does not express an opinion on the effectiveness of ICFR.

Solution: A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting. A scope limitation occurs when auditors cannot perform planned procedures to gather sufficient appropriate evidence regarding the design and effectiveness of a client's internal controls. A disclaimer of opinion states that the auditor does not express an opinion on the effectiveness of ICFR.

In the given table, match the terms related to the auditor’s report on the left with their details on the right.

A. Review engagement

||A CPA uses inquiry and analytical procedures to provide limited assurance that no material modifications should be made to the financial statements for them to be in accordance with the applicable financial reporting framework.

B. Inquiry and analytical procedures

||Designed to focus on areas the CPA believes to have increased risks of material misstatements.

C. Limited assurance

||Provided by the CPA in a review engagement.

D. Reasonable assurance

||Provided by the CPA in an audit engagement.

Solution:

A review engagement is an engagement in which a CPA uses inquiry and analytical procedures to provide limited assurance that no material modifications should be made to the financial statements for them to be in accordance with the applicable financial reporting framework.

Inquiry and analytical procedures are designed to focus on areas the CPA believes to have increased risks of material misstatements.

Limited assurance is provided by the CPA in a review engagement.

Reasonable assurance is provided by the CPA in an audit engagement.

Question Type: Multiple choice multi select

Which three of the following situations are considered a change in accounting principle?

A. Changing from one acceptable accounting principle to another acceptable accounting principle

B. Changing from one acceptable accounting principle to a newly adopted accounting principle

C. Changing the method of applying an acceptable accounting principle

D. Changing from one acceptable accounting principal to another accounting principle that is not yet accepted

Solution: The following situations are considered a change in accounting principle:

• 1. Changing from one acceptable accounting principle to another acceptable accounting principle,
  2. Changing from one acceptable accounting principle to a newly adopted accounting principle,
  3. Changing the method of applying an acceptable accounting principle.

The portion of the consolidated financial statements audited by the component auditor can be expressed in which of the following three forms?

A. Dollar amounts

B. Percentages of total assets

C. Total revenues

D. Account payables

Solution: The portion of the consolidated financial statements audited by the component auditor can be expressed in dollar amounts, percentages of total assets, or total revenues.

Which three of the following are scenarios that may cause a material scope limitation?

A. Circumstances beyond the control of the entity

B. Circumstances relating to the nature or timing of the auditor’s work

C. Scope limitation imposed by management

D. Scope limitation imposed by component auditor

Solution: AU-C 705.A3 lists three scenarios that may cause a material scope limitation:

• 1. Circumstances beyond the control of the entity,
  2. Circumstances relating to the nature or timing of the auditor’s work,
  3. Scope limitation imposed by management.

What three steps are followed if new information is discovered during the period between the date of the auditor’s report and the report release date?

A. Discussing the matter with the appropriate level of management

B. Determining whether the financial statements need to be revised

C. Inquiring of management as to how it will address the situation in the financial statements

D. Not altering the opinion if management refuses to sign the updated representation letter or refuses to revise the financial statements

Solution: The following three steps are followed if new information is discovered during the period between the date of the auditor’s report and the report release date:

1) Discussing the matter with the appropriate level of management,

2) Determining whether the financial statements need to be revised,

3) Inquiring management as to how it will address the situation in the financial statements.

Which three of the following are components of unqualified opinion on the effectiveness of internal control over financial reporting (ICFR) for public companies?

A. Opinion paragraph

B. Scope paragraph

C. Basis for opinion paragraph

D. Auditory paragraph

Solution: The following three are components of unqualified opinion on the effectiveness of ICFR for public companies: 1. opinion paragraph; 2. scope paragraph; and 3. basis for opinion paragraph.

Which three conditions must be met when a CPA is considering whether to accept a review engagement?

A. Management must agree to provide a representation letter at the conclusion of the review engagement.

B. The CPA must obtain an agreement from management that it acknowledges its responsibility for the preparation and fair presentation of the financial statements.

C. The financial reporting framework selected by management must be acceptable.

D. The CPA may not always be independent of the client.

Solution: Three conditions that must be met when a CPA is considering whether to accept a review engagement are as follows:

• 1. Management must agree to provide a representation letter at the conclusion of the review engagement,
  2. The CPA must obtain an agreement from management that it acknowledges its responsibility for the preparation and fair presentation of the financial statements,
  3. The financial reporting framework selected by management must be acceptable.

Question Type: Short Answer

Briefly discuss the conditions that would prohibit an auditor from issuing an unqualified opinion.

What type of reports can an auditor issue if they cannot provide an unqualified audit report?

Sally Jones is a staff accountant and has been assigned to the audit of Pipeline Services, Inc.

Compare the two scenarios that would cause auditors to modify the audit opinion and provide an example of each.

The following four situations require a modification to the standard unqualified audit report. Identify the modification required for each.

1. Opinion based in part on the report of another auditor
2. Going concern
3. Lack of consistency
4. Subsequent event
5. This situation results in a modification of the wording for the three paragraphs included in the standard report
6. This situation results in an explanatory paragraph found after the opinion paragraph
7. This situation results in an explanatory paragraph found after the opinion paragraph
8. This situation results in an explanatory paragraph found after the opinion paragraph

For each of the following situations, indicate what type of audit report is most appropriate:

1. The auditor lacks independence in fact, but not necessarily in appearance.
2. There is a scope limitation and it is material, but the overall financial statements are still presented fairly.
3. The uncorrected misstatements are immaterial.
4. There is a departure from Generally Accepted Accounting Principles (GAAP), and it is pervasively material.
5. Disclaimer
6. Qualified
7. Unqualified
8. Adverse

Assume you completed your fieldwork on the XYZ Company audit of the December 31, 2025 financial statements on February 11, 2026. On February 13, 2026, you discovered that XYZ's largest customer filed for bankruptcy. XYZ has not yet released the financial statements. What is your responsibility as an auditor and what steps should be taken, if any?

The auditors of BZ Manufacturing completed their fieldwork on February 15, 2022. However, they became aware of a subsequently discovered fact requiring revision on February 20, 2022. Compare and contrast the two options auditors have for dating the audit report in relation to performing audit procedures on subsequently discovered facts that become known before the report release date.

Assume you completed your fieldwork on the XYZ Company audit of the December 31, 2025 financial statements on February 15, 2026. The financial statements were released on February 28, 2026. On March 16, 2026, you discovered that XYZ's largest customer filed for bankruptcy, which you believe could have caused you to change the audit report. How is your responsibility as an auditor, and the steps that should be taken, different than if you had been made aware of the subsequently discovered fact before February 28, 2026?

In the paragraph below, there are three errors in the basis for opinion paragraph of the unqualified opinion on the effectiveness of ICFR for public companies. Rewrite the paragraph to correct the errors.

Pen and Jones, CPAs, were engaged to perform an audit of the financial statements of AZG, Inc. AZG 's management would not allow Pen and Jones to confirm any of the accounts receivable. All other auditing procedures were performed as considered necessary by Pen and Jones, and no problems were found. However, Pen and Jones, were unable to satisfy themselves with regard to the balance in accounts receivable. 

Small Town Bank would like to gain a degree of comfort regarding the financial statements of Home Town Builders, Inc., a company for which Small Town Bank provides a line of credit. The cost of an audit would be prohibitive for Home Town Builders. Compare two other types of services that accounting firms can provide to Home Town Builders that may be acceptable to Small Town Bank.

During the compilation engagement for Cozy Couches Company, CPA Jim Bryce becomes aware that the accounting records and other information provided by management are incomplete and inaccurate. What should Jim Bryce do in this situation?

The _______ states the auditor’s opinion that the financial statements are fairly presented, in all material respects, in accordance with the applicable financial reporting framework.

Audit standards require an emphasis-of-matter paragraph for _______ and consistency issues.

A/an _______ is responsible for issuing the audit report on the group financial statements.

_______ is not confined to specific elements, accounts, or items of the financial statements.

_______ shows two dates on an audit report; one date is the end of fieldwork and the other is the date of a revision to the financial statements.

When one or more material weaknesses in internal control over financial reporting (ICFR)are identified, it would cause auditors to _______.

A/an _______ is an attest engagement performed on the financial statements of a private company client.

A. [review engagement] | audit engagement | compilation engagement | financial review engagement

Solution: A review engagement is an attest engagement performed on the financial statements of a private company client.