Chapter 12 Quiz

Student: ___________________________________________________________________________

1. An auditor is involved in the audit of a large unincorporated charity that has numerous members,
employees, suppliers and clients. Which of the following professional statements and legislative
pronouncements must the auditor consider when forming the auditor’s opinion?

A. The Corporations Act 2001 and AASB standards.

B. The Corporations Act 2001 and auditing standards.

C. Auditing standards and AASB standards.

D. The Corporations Act 2001, auditing standards and AASB standards.

2. An auditor is involved in the audit of Natural Fruit Pty Ltd, a family-owned business supplying organic
fruit and vegetables to the wholesale and retail markets through a number of retail outlets. Due to the
family nature of the business the company has been granted relief from compliance with some AASB
standards. Which of the following professional statements and legislative pronouncements must the auditor
consider when forming the auditor’s opinion?

A. The Corporations Act 2001 and AASB standards.

B. The Corporations Act 2001 and auditing standards.

C. Auditing standards and AASB standards.

D. The Corporations Act 2001, auditing standards and AASB standards.

3. Which of the following statements is true?

A. Auditors must use the form of auditor’s report contained in the appendices to ASA 700 (ISA 700), ASA 705 (ISA 705) and
ASA 706(ISA 706).

B. The form and content of the auditor’s report is determined by the audit engagement letter.

C. The partner responsible for the audit must sign the auditor’s report.

D. The auditor may delay issuing the auditor’s report in order to obtain additional audit evidence.

4. During the audit of Bell Ltd (Bell), an auditor finds a number of processing errors for sales. The total error
has resulted in overstatements to sales and accounts receivable of $30 000. Discussions with management
indicate the problem was a result of staff leave and some confusion regarding processing of routine sales.
The process has now been amended to ensure the error does not occur again. As it is late in the audit, the
client has refused to adjust the financial report for the error. Net assets of Bell are $5 000 000 and the
operating profit has been reported as $650 000. Which of the following auditor’s opinions do you believe is
appropriate for Bell?

A.
Unmodified.

B.
Unmodified with an Emphasis of Matter paragraph.

C.
Qualified.

D.
Unmodified with an Other Matter paragraph.
5. Effects of misstatements, omissions or inability to verify items are considered to be pervasive if:

A. in relation to inability to obtain sufficient appropriate audit evidence, they are material.

B. in relation to disagreements with management, they relate to a breach of an accounting standard.

C. in relation to disclosures, they are fundamental to users’ understanding of the financial report.

D. All of the given answers are correct.

6. An auditor is involved in the audit of Cheddar Ltd (Cheddar). A number of disagreements occurred during
the audit concerning valuation of the company’s assets. These disagreements remain unresolved at the time
of forming the auditor’s opinion. In the opinion of the auditor, the assets are overvalued by $1 000 000. If
the assets were revalued, $500 000 would be offset against balances in the asset revaluation surplus and the
remaining decrement would be recorded as a loss on revaluation. Net assets of Cheddar are $5 000 000 and
profit is currently $1 000 000. Which of the following options would you recommend the auditor take with
respect to this matter?

A. Issue a qualified auditor’s opinion.

B. Issue an unmodified auditor’s opinion and include discussion of the issue in the Key Matters paragraph.

C. Issue an unmodified opinion with an Emphasis of Matter paragraph.

D. Issue an adverse opinion.

7. During the audit of Broom Ltd, an auditor notes that directors’ remuneration has not been calculated in
accordance with relevant guidance, as one director’s remuneration has been omitted. The difference in total
remuneration is $15 300, and the error has the effect of altering the directors’ banding marginally. Net
assets of the company are $2 billion and operating profit for the year is $1.5 million. Assuming the board
refuses to make amendments to the financial report for the error in directors’ remuneration, it would
represent:

A. An immaterial disagreement with management.

B. A material disagreement with management.

C. An immaterial inability to obtain sufficient appropriate audit evidence.

D. A material inability to obtain sufficient appropriate audit evidence.

8. During the audit of River Ltd (River), the auditor became aware of a small fraud involving warehouse staff.
The matter was promptly reported to management and appropriate action taken. The total value of
inventory lost in the fraud was $15 000. The accounting records were adjusted to ensure the correct balance
was recorded. There were no other exceptions noted during the audit. Net assets of River are $1.5 million
and operating profit is reported as $250 000. Which of the following types of opinions should the auditor
issue?

A.
Adverse.

B.
Qualified.

C.
Unmodified with an Emphasis of Matter paragraph.

D.
Unmodified.
9. Under Section 311 of the Corporations Act 2001 the auditor is required to report directly to ASIC any
significant breaches of the Act. Which of the following would not be considered a significant breach?

A. Misleading and deceptive conduct by directors.

B. Non-compliance with accounting standard AASB 102.

C. Failure to keep minutes of board meetings up to date.

D. Insolvent trading.

10. Security Pty Ltd (Security) is a small manufacturer with an extensive IT system in place. During the audit
of Security’s financial report, the auditor notes a number of control deficiencies in key IT applications and
amends the audit strategy to ensure substantive testing is conducted in these areas. At the completion of the
audit, the auditor still has concerns regarding controls in IT, but believes they have sufficient appropriate
audit evidence to support the financial report disclosures. How should the auditor communicate the control
deficiencies to shareholders?

A. Issue a qualified auditor’s opinion mentioning the control deficiencies.

B. The auditor is under no obligation to report control deficiencies to shareholders. Instead, the auditor should issue an
unmodified opinion and inform management and the board of the deficiencies.

C. Include an Emphasis of Matter paragraph in the auditor’s opinion, drawing shareholders’ attention to the impact of the
deficiencies.

D. Brief shareholders on the deficiencies and their potential impact(s) at Security’s AGM.
 Chapter 12 Quiz Key

1. An auditor is involved in the audit of a large unincorporated charity that has numerous members,
employees, suppliers and clients. Which of the following professional statements and legislative
pronouncements must the auditor consider when forming the auditor’s opinion?

A. The Corporations Act 2001 and AASB standards.

B. The Corporations Act 2001 and auditing standards.

C. Auditing standards and AASB standards.

D. The Corporations Act 2001, auditing standards and AASB standards.

As the charityis unincorporated, it is not required to comply with the requirements of the Corporations
Act 2001. A large charity is likely to be a reporting entity and so it must comply with AASB accounting
standards. Regardless of the status of the entity being audited, the auditor must comply with auditing
standards in forming the auditor’s opinion.
AACSB: Analytic
Difficulty: Easy
Learning Objective: 12.01 Understand the nature and significance of the auditor's reporting obligations
Topic: Obligations to report
2. An auditor is involved in the audit of Natural Fruit Pty Ltd, a family-owned business supplying organic
fruit and vegetables to the wholesale and retail markets through a number of retail outlets. Due to the
family nature of the business the company has been granted relief from compliance with some AASB
standards. Which of the following professional statements and legislative pronouncements must the
auditor consider when forming the auditor’s opinion?

A. The Corporations Act 2001 and AASB standards.

B. The Corporations Act 2001 and auditing standards.

C. Auditing standards and AASB standards.

D. The Corporations Act 2001, auditing standards and AASB standards.

As Natural Fruit Pty Ltd is incorporated, the auditor will need to consider the Corporations Act 2001.
The Corporations Act 2001 specifically requires the auditor to consider the AASB series of accounting
standards, even though the company has been granted relief from compliance with some standards.
Regardless of the status of the entity being audited, the auditor must comply with auditing standards in
forming the auditor’s opinion.

AACSB: Analytic
Difficulty: Easy
Learning Objective: 12.01 Understand the nature and significance of the auditor's reporting obligations
Topic: Obligations to report
3. Which of the following statements is true?

A. Auditors must use the form of auditor’s report contained in the appendices to ASA 700 (ISA 700), ASA 705 (ISA 705)
and ASA 706(ISA 706).

B. The form and content of the auditor’s report is determined by the audit engagement letter.

C. The partner responsible for the audit must sign the auditor’s report.

D. The auditor may delay issuing the auditor’s report in order to obtain additional audit evidence.

The Corporations Act 2001 indicates the partner responsible for the audit must sign the auditor’s report
in both the firm name and his/her own name. The appendices to ASA 700 (ISA 700), ASA 705 (ISA
705) and ASA 706 (ISA 706) are a guide only. The standards themselves contain the mandatory
requirements. In practice, however, the appendices have been widely adopted and this has assisted with
comparability between auditor’s reports. The timeliness of the auditor’s report is one of the qualitative
criteria specified in ASA 700 (ISA 700). This means the auditor cannot delay the auditor’s report in the
hope of avoiding a modified auditor’s opinion.

AACSB: Analytic
Difficulty: Medium
Learning Objective: 12.02 Understand the structure and wording of the auditor’s report and appreciate the recent changes to the report which are designed to enhance
its communication effectiveness
Topic: The auditor’s report and its communication effectiveness
4. During the audit of Bell Ltd (Bell), an auditor finds a number of processing errors for sales. The total
error has resulted in overstatements to sales and accounts receivable of $30 000. Discussions with
management indicate the problem was a result of staff leave and some confusion regarding processing
of routine sales. The process has now been amended to ensure the error does not occur again. As it is
late in the audit, the client has refused to adjust the financial report for the error. Net assets of Bell are
$5 000 000 and the operating profit has been reported as $650 000. Which of the following auditor’s
opinions do you believe is appropriate for Bell?

A.
Unmodified.

B.
Unmodified with an Emphasis of Matter paragraph.

C.
Qualified.

D.
Unmodified with an Other Matter paragraph.

The error is unlikely to be material from either a quantitative or qualitative point of view, given it is a
routine transaction and represents less than 5per cent of relevant balances. The auditor is therefore likely
to accept the client’s point of view, hence no disagreement with management will occur and no
modification will be necessary. An Emphasis of Matter paragraph is only appropriate for issues that are
already correctly disclosed in the financial report, but need to be brought to users’ attention. An Other
Matter paragraph is used only where something that is not included in the financial report needsto be
brought to users’ attention

AACSB: Analytic
Difficulty: Medium
Learning Objective: 12.04 Identify the different types of auditor's reports-unmodified auditor's reports; modifications to the auditor's opinion (resulting in a qualified
opinion, adverse opinion or disclaimer of opinion); and auditor's reports containing additional communications (Emphasis of Matter or Other Matter paragraphs)-and
describe the circumstances under which an auditor would issue each type of report
Topic: Types of auditor's opinions
5. Effects of misstatements, omissions or inability to verify items are considered to be pervasive if:

A. in relation to inability to obtain sufficient appropriate audit evidence, they are material.

B. in relation to disagreements with management, they relate to a breach of an accounting standard.

C. in relation to disclosures, they are fundamental to users’ understanding of the financial report.

D. All of the given answers are correct.

In relation to disclosures, effects are considered to be pervasive if, in the auditor’s judgment, they are
fundamental to users’ understanding of the financial report. Items need to be more than just material to
be pervasive, they need to result in the whole financial report being misleading or useless. A breach of
an accounting standard is not necessarily pervasive, depending on its effect.

AACSB: Analytic
Difficulty: Hard
Learning Objective: 12.04 Identify the different types of auditor's reports-unmodified auditor's reports; modifications to the auditor's opinion (resulting in a qualified
opinion, adverse opinion or disclaimer of opinion); and auditor's reports containing additional communications (Emphasis of Matter or Other Matter paragraphs)-and
describe the circumstances under which an auditor would issue each type of report
Topic: Types of auditor's opinions
6. An auditor is involved in the audit of Cheddar Ltd (Cheddar). A number of disagreements occurred
during the audit concerning valuation of the company’s assets. These disagreements remain unresolved
at the time of forming the auditor’s opinion. In the opinion of the auditor, the assets are overvalued by
$1 000 000. If the assets were revalued, $500 000 would be offset against balances in the asset
revaluation surplus and the remaining decrement would be recorded as a loss on revaluation. Net assets
of Cheddar are $5 000 000 and profit is currently $1 000 000. Which of the following options would
you recommend the auditor take with respect to this matter?

A. Issue a qualified auditor’s opinion.

B. Issue an unmodified auditor’s opinion and include discussion of the issue in the Key Matters paragraph.

C. Issue an unmodified opinion with an Emphasis of Matter paragraph.

D. Issue an adverse opinion.

The issue is a disagreement with management, which is likely to be material but not pervasive, as it
does not make the whole financial report misleading or useless. Accordingly a qualified auditor’s
opinion is required.

AACSB: Analytic
Difficulty: Hard
Learning Objective: 12.04 Identify the different types of auditor's reports-unmodified auditor's reports; modifications to the auditor's opinion (resulting in a qualified
opinion, adverse opinion or disclaimer of opinion); and auditor's reports containing additional communications (Emphasis of Matter or Other Matter paragraphs)-and
describe the circumstances under which an auditor would issue each type of report
Topic: Types of auditor's opinions
7. During the audit of Broom Ltd, an auditor notes that directors’ remuneration has not been calculated in
accordance with relevant guidance, as one director’s remuneration has been omitted. The difference in
total remuneration is $15 300, and the error has the effect of altering the directors’ banding marginally.
Net assets of the company are $2 billion and operating profit for the year is $1.5 million. Assuming the
board refuses to make amendments to the financial report for the error in directors’ remuneration, it
would represent:

A. An immaterial disagreement with management.

B. A material disagreement with management.

C. An immaterial inability to obtain sufficient appropriate audit evidence.

D. A material inability to obtain sufficient appropriate audit evidence.

While the error is not material from a quantitative point of view, all transactions with directors should
be correctly disclosed regardless of their value; hence, non-disclosure is a material breach of an
accounting standard. Accordingly, a material disagreement with management has occurred. The auditor
has gathered sufficient appropriate audit evidence to determine the extent of the error.
AACSB: Analytic
Difficulty: Hard
Learning Objective: 12.05 Identify the reasons for departures from a standard unmodified auditor's report, material misstatement and limitations imposed
on the scope of the audit, and understand the factors giving rise to these reasons
Topic: Circumstances giving rise to a modified opinion
8. During the audit of River Ltd (River), the auditor became aware of a small fraud involving warehouse
staff. The matter was promptly reported to management and appropriate action taken. The total value of
inventory lost in the fraud was $15 000. The accounting records were adjusted to ensure the correct
balance was recorded. There were no other exceptions noted during the audit. Net assets of River are
$1.5 million and operating profit is reported as $250 000. Which of the following types of opinions
should the auditor issue?

A.
Adverse.

B.
Qualified.

C.
Unmodified with an Emphasis of Matter paragraph.

D.
Unmodified.

The error is immaterial in value and, as management has taken appropriate action, is also unlikely to be
material in nature. Accordingly, an unmodified auditor’s opinion should be issued. An Emphasis of
Matter paragraph is only appropriate for issues that are already presented or disclosed in the financial
report.

AACSB: Analytic
Difficulty: Medium
Learning Objective: 12.04 Identify the different types of auditor's reports-unmodified auditor's reports; modifications to the auditor's opinion (resulting in a qualified
opinion, adverse opinion or disclaimer of opinion); and auditor's reports containing additional communications (Emphasis of Matter or Other Matter paragraphs)-and
describe the circumstances under which an auditor would issue each type of report
Topic: Types of auditor's opinions
9. Under Section 311 of the Corporations Act 2001 the auditor is required to report directly to ASIC any
significant breaches of the Act. Which of the following would not be considered a significant breach?

A. Misleading and deceptive conduct by directors.

B. Non-compliance with accounting standard AASB 102.

C. Failure to keep minutes of board meetings up to date.

D. Insolvent trading.

Failure to keep board minutes up to date is a minor breach that can be remedied by reporting the breach
to directors and getting directors to update minutes. The other given answers are all example of
significant breaches given in Regulatory Guide 34.

AACSB: Analytic
Difficulty: Medium
Learning Objective: 12.01 Understand the nature and significance of the auditor's reporting obligations
Topic: Obligations to report
10. Security Pty Ltd (Security) is a small manufacturer with an extensive IT system in place. During the
audit of Security’s financial report, the auditor notes a number of control deficiencies in key IT
applications and amends the audit strategy to ensure substantive testing is conducted in these areas. At
the completion of the audit, the auditor still has concerns regarding controls in IT, but believes they
have sufficient appropriate audit evidence to support the financial report disclosures. How should the
auditor communicate the control deficiencies to shareholders?

A. Issue a qualified auditor’s opinion mentioning the control deficiencies.

B. The auditor is under no obligation to report control deficiencies to shareholders. Instead, the auditor should issue an
unmodified opinion and inform management and the board of the deficiencies.

C. Include an Emphasis of Matter paragraph in the auditor’s opinion, drawing shareholders’ attention to the impact of the
deficiencies.

D. Brief shareholders on the deficiencies and their potential impact(s) at Security’s AGM.

In a financial report audit the auditor has no obligation to report on controls; however, where
deficiencies are noted the auditor should bring these matters to the attention of management, usually in
the form of a management letter. Reporting on internal controls is outside the scope of a financial report
audit, and thus is not a matter for modification or other comment in the auditor’s report, nor is it an area
that the auditor would usually address at the AGM.

AACSB: Analytic
Difficulty: Medium
Learning Objective: 12.07 Describe communications other than the auditor's report between the auditor and shareholders, those charged with governance, and
management
Topic: Communications between the auditor and other parties