he correct answer for each question is indicated by a

1 INCORRECT

In their examination, the auditors concluded that True Fax's financial statements presented its financial condition, results of operations, and cash flows in conformity with GAAP. In his Letter to Stockholders in the annual report, True Fax's president states that this year was the most profitable year in the company's history. Actually, the company did better profit-wise last year according to the audited financial statements. What type of opinion should the auditors issue? An unqualified opinion with an additional paragraph noting the A) inconsistency. A disclaimer of opinion because the additional information B) accompanying the financial statements was not audited. An adverse opinion because the annual report does not fairly C) present the financial condition of the company. A qualified opinion because the president's letter is not part of the D) audited financial statements. Feedback: Incorrect. An adverse opinion would not be appropriate, because the financial statements presented the entity's financial condition, results of operations, and cash flows in conformity with GAAP.

2 CORRECT

The auditors conclude that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. If the entity's financial statements adequately disclose its financial difficulties, the auditors' report is required to include an explanatory paragraph that specifically mentions

A) B) C)

A B C

D D) Feedback: Correct. If the auditors have substantial doubt about the entity's ability to continue as a going concern, the phrase "going concern" must be included in the explanatory paragraph. The phrase "management's plans" is not required to be included.

3 INCORRECT

Auditors may express a qualified opinion because of

A) B) C)

A B C

D D) Feedback: Incorrect. Qualified opinions may be expressed because of scope limitations.

4 INCORRECT

In which of the following situations could auditors express an unqualified opinion with an explanatory paragraph? The auditors wish to emphasize that the entity had lost a significant A) customer. The auditors decide to not refer to the report of component auditors B) as a basis, in part, for their opinion on group financial statements. The entity issues financial statements that present its financial position, results of operations, and cash flows in conformity with C) GAAP but omits the necessary footnote disclosures. At the entity's request, their attorney has refused to respond to the D) auditors' inquiries about ongoing litigation. Feedback: Incorrect. The omission of footnote disclosures is a departure from GAAP that would result in the issuance of either a qualified or adverse opinion. The group auditors decide not to assume responsibility for the work of component auditors who audited a wholly-owned subsidiary of the group financial statements. The total assets and revenues of the subsidiary represent 27% and 28% of the related group financial statements. If no issues are encountered in either the group auditors' or component auditors' examination, what type of opinion should the group auditors issue? A) B) C) Unqualified opinion. Adverse opinion. Qualified opinion.

5 INCORRECT

Disclaimer of opinion. D) Feedback: Incorrect. A qualified opinion would only be issued if material (but not pervasive) departures from GAAP or scope limitations were encountered. The reliance on the work of component auditors is not a scope limitation.

6 CORRECT

The opinion paragraph of the auditors' report states: "In our opinion, with the exception of the effects of not observing inventory in one of the client's Siberian warehouses, as discussed in the preceding paragraph, the financial statements present fairly, in all material respects..." This paragraph expresses a(n) A) B) C) Unqualified opinion. Adverse opinion. Qualified opinion.

Opinion modified because of an uncertainty. D) Feedback: Correct. This scope limitation would result in either a qualified opinion or a disclaimer of opinion.

7 CORRECT

In which of the following circumstances would auditors be most likely to express an adverse opinion? The chief executive officer refuses the auditors access to minutes of A) board of directors' meetings. The entity's internal control is so poor that control risk must be B) assessed at the maximum level. The financial statements are not in conformity with generally accepted accounting principles regarding the valuation of C) marketable securities. The entity has filed for bankruptcy and appears to be subject to D) going-concern uncertainties. Feedback: Correct. A material and pervasive departure from GAAP would result in the auditor issuing an adverse opinion on the financial statements.

8 INCORRECT

Auditors were unable to obtain sufficient appropriate evidence concerning certain transactions because a fire destroyed all the entity's accounting records. Given these circumstance, auditors would most likely choose between a(n) Qualified opinion and an unqualified opinion with an explanatory A) paragraph. Unqualified opinion with an explanatory paragraph and an adverse B) opinion. C) Adverse opinion and a disclaimer of opinion.

Disclaimer of opinion and a qualified opinion. D) Feedback: Incorrect. While a disclaimer of opinion is a possibility, auditors would only issue an adverse opinion for a material and pervasive departure from GAAP.

9 CORRECT

Auditors who are reporting on financial statements that contain a material departure from GAAP should include a separate explanatory paragraph and Not modify the opinion paragraph as long as the departure is A) adequately disclosed in a footnote. Disclaim an opinion on the financial statements.

B) C) Express a qualified or adverse opinion.

Express a qualified opinion or disclaim an opinion. D) Feedback: Correct. A departure from GAAP results in either a qualified or adverse opinion.

10 INCORRECT

When auditors mention consistency in their report, a reader of the financial statements may infer that GAAP has been not consistently observed in the current period in A) relation to the preceding period. B) C) A material departure from GAAP has been detected. A reclassification of items or change in classifications has occurred.

Nothing about application of accounting principles within the period. D) Feedback: Incorrect. A reclassification would not result in the addition of an explanatory paragraph to an otherwise standard repor