Chapter 15 Audit Reports On

Chapter 15: Audit Reports on Financial Statements Chapter 15: Audit Reports on
Financial Statements
Student: ___________________________________________________________________________
1. For the last several years, both the Financial Accounting Standards Board (FASB) and the International
Auditing and Assurance Standards Board (IAASB) have been considering possible changes to the standard
unqualified audit report.
True False
2. The audit report can be a verbal presentation to the audit committee about the client.
True False
3. There are no differences in audit report requirements across the standards of the AICPA, PCAOB, and
IAASB.
True False
4. The auditor should only provide an opinion on the financial statements if the opinion indicates that the
financial statements are fairly stated in all material respects.
True False
5. The audit report delineates the responsibility of client management and that of the audit firm.
True False
6. A client that has a departure from generally accepted accounting principles that is immaterial will receive a
qualified or adverse opinion.
True False
7. For some engagements, the financial statements might be audited in accordance with multiple auditing
standards.
True False
8. When there is an uncertainty surrounding the financial statements, the auditor may still be able to give an
unqualified opinion.
True False
9. An important component of an audit report is that the title includes the word “competent.”
True False
10. Andrews Corporation adopted an accounting principle that is a material departure from GAAP. The auditor
determined that the financial statements are fairly presented, except for this specifically identifiable GAAP
departure, and therefore would issue a disclaimer of opinion.
True False
11. The audit report is modified to five paragraphs as a result of another audit firm performing part of the
financial statement audit.
True False
12. A justified departure from GAAP will result in the issuance of an adverse opinion.
True False
13. When financial statements contain generally accepted accounting principles in the current year that are
different from the generally accepted accounting principles used in the preceding year, the auditor will typically
make mention of it in the opinion.
True False
14. After the balance sheet date but prior to the audit report date the client decides to acquire Bargain Company
to obtain a significant increase in revenues. The auditor would probably give a report that includes the
statement: "except for the acquisition of Bargain Company...".
True False
15. An unqualified audit opinion with an explanatory paragraph often makes reference to the footnotes of the
financial statements
True False
16. The substantial doubt about an entity's ability to continue as a going concern is a phrase that is used in an
unqualified opinion with a certain type of explanatory language.
True False
17. Under international auditing standards, when the audit client has engaged other audit firms to audit remote
locations around the country, the principal auditor must mention the other audit firms in the audit report.
True False
18. An auditor is not required to tell the reader of an audit report when there has been a change in accounting
principles that materially affects the financial statements.
True False
19. The term "except for" is used in the opinion paragraph of an audit report that will be qualified for a GAAP
violation that is not pervasive.
True False
20. A client that treats a material lease transaction as an operating lease when it is in fact a capital lease has
deviated from GAAP and will receive a qualified or adverse opinion.
True False
21. Restrictions on the scope of the audit whether imposed by the client or circumstances may require the
auditor to issue either a qualified or an adverse opinion.
True False
22. For a change in accounting principles that management does not justify to the auditor, the auditor will likely
choose between a qualified and an adverse opinion.
True False
23. Inconsistent application of accounting principles by the client is a GAAP violation and would result in a
qualified audit report.
True False
24. Uncertainties, such as doubt about the going concern of a client, may result in an adverse opinion.
True False
25. If the auditor concludes that the financial statements taken as a whole are not fairly presented, the auditor
should issue an adverse opinion.
True False
26. If scope limitations that are not client-imposed exist make it impossible for the auditor to form an opinion,
the auditor should render an adverse opinion.
True False
27. The failure of a client to include a statement of cash flows will result in the issuance of a disclaimer of
opinion by the auditor.
True False
28. When the auditor is unable to obtain sufficient, appropriate evidence concerning the beginning inventory,
which is material, the report is modified by adding an explanatory paragraph prior to the opinion paragraph and
appropriate modification to the scope paragraph.
True False
29. The client will not allow Collier and Company, CPAs to read the minutes of the board of director's meetings
that occurred during the year under audit. Such a limitation will usually result in the auditor issuing a
disclaimer.
True False
30. If the firm auditing a company realizes that it is not independent with respect to the client, it will issue
disclaimer of opinion based on the inherent GAAP violation imposed by the audit firm.
True False
31. For a client with serious going concern issues the auditor has to make a choice between issuing an
unqualified audit report with an explanatory paragraph or a disclaimer.
True False
32. An auditor can issue a disclaimer of opinion because of an inability to obtain sufficient appropriate
evidence.
True False
33. When circumstances preclude an auditor from performing certain procedures and the auditor can be satisfied
using other alternative procedures, a disclaimer of opinion will be rendered.
True False
34. The scope paragraph of an unqualified opinion primarily provides information relating to the division of
responsibilities.
True False
35. Because of its importance, the decision about what type of opinion to issue is often made after consultation
with other professionals within the firm.
True False
36. If a significant scope limitation is imposed by the client, a disclaimer should ordinarily be issued.
True False
37. The most difficult decisions about which opinion to issue are generally centered around decisions based on
the materiality level and pervasiveness of GAAP violations, the significance of scope limitations, and the
likelihood of the entity being a going concern.
True False
38. The auditor is only concerned about the aggregate internal control deficiencies when determining the
appropriate opinion on internal control over financial reporting (ICFR).
True False
39. The auditor will issue an unqualified opinion on ICFR if the auditor has identified only one material
weakness in ICFR.
True False
40. The auditor will modify the audit report on ICFR effectiveness when management's annual certification
pursuant to Section 302 of the Sarbanes-Oxley Act is misstated.
True False
41. If the auditor determines that management’s annual report on internal controls is incomplete or not properly
presented, the auditor’s report will include an explanatory paragraph that describes the reasons for this
determination.
True False
42. The decision about whether to make reference to another auditor in the report on the audit of ICFR does not
differ from the corresponding decision as it relates to the audit of the financial statements.
True False
43. Auditing reporting standards for financial statement and integrated audits require auditors to provide which
of the following?
A. Positive assurance.
B. Negative assurance.
C. Materiality assurance.
D. No assurance.
44. Which of the following is a change that is not being debated by auditing standard setters and investors?
A. Adding disclosure about which engagement partner at the firm supervised the audit and who from outside the
audit firm participated in the audit
B. Adding commentary on areas of risk of material misstatement of the financial statements identified by the
auditor.
C. Adding commentary about the level of materiality applied by the auditor to perform the audit.
D. All of the above are being debated.
45. According to the AICPA, the auditor needs to form an opinion on the financial statements based on an
evaluation of the audit evidence obtained. This is stated in which AICPA principle governing an audit conducted
in accordance with GAAS?
A. Principle 1
B. Principle 4
C. Principle 5
D. Principle 7
46. According to the AICPA, the auditor needs to clearly express an opinion based on audit evidence obtained in
the form of a written report.This is stated in which AICPA principle governing an audit conducted in accordance
with GAAS?
A. Principle 1
B. Principle 4
C. Principle 5
D. Principle 7
47. According to the AICPA principles, which of the following is incorrect?

A. If the auditor has reservations about the fairness of financial statement presentation, the reason(s) must be
stated in the auditor’s report.
B. If there is a material departure from GAAP in the financial statements, the auditor should explicitly state the
nature of the departure and the dollar effects where determinable.
C. Auditors should state the reasons why an unqualified opinion cannot be issued.
D. Auditors should issue an unqualified opinion in all cases where companies have provided an entire set of
financial statements and footnotes that include all years presented for comparative purposes.
48. Which one of the following is not a type of unqualified audit opinion issued by auditors?
A. Standard with three paragraphs.
B. Includes explanatory paragraph.
C. Includes modifications.
D. Does not include the opinion paragraph.
49. Which one of the following is an example of the contents of an opinion paragraph found in an audit report?
A. "We have audited...."
B. "Nothing came to our attention..."
C. "The financial statements referred to above present fairly,..."
D. "An audit includes examining, on a test basis..."
50. In which one of the following instances would an auditor most likely issue a standard unqualified opinion
without explanatory language?
A. Management's disclosures are missing or inadequate.
B. There is substantial doubt about the entity's ability to continue as a going concern.
C. There is a significant limitation on the scope of the engagement.
D. There is an immaterial deviation from GAAP related to capitalizing repairs.
51. The division of responsibility between the reporting company's management and the audit firm is described
in which one of the following?
A. Scope paragraph.
B. Introductory paragraph.
C. Notes to the financial statements.
D. Opinion paragraph.
52. If the auditor believes that there is a remote probability that resolution of an uncertainty will have a material
effect on the financial statements, which of the following would the auditor issue?
A. A disclaimer of opinion.
B. A standard unqualified opinion.
C. An adverse opinion.
D. An unqualified opinion with explanatory paragraphs.
53. The scope paragraph of an unqualified opinion primarily gives information relating to which of the
following?
A. The division of responsibilities.
B. The final assessment of a company’s standings with the audit firm.
C. The statements and dates under audit.
D. Audit planning and procedure.
54. Audit reports are designed to promote clear communication between the auditor and the financial statement
user. Which of the following is not delineated in the audit report?
A. What was audited and the relative responsibilities of the client and the auditor.
B. The experience level of the audit team.
C. The nature of the audit opinion formulation process.
D. The auditor’s opinion on the fairness of the financial statements.
55. If the auditor decides to draw attention to large related party transactions occurring in the financial
statements of the client, which report will most likely be issued?
A. Qualified.
B. Unqualified with an explanatory paragraph
C. Adverse.
D. Consolidation.
56. The use of another CPA firm by an audit firm to perform part of the engagement on a client's subsidiary will
require the audit firm to do which of the following?
A. Merge with the other CPA firm.
B. Perform a peer review on the other CPA firm.
C. Ensure the independence of the other CPA firm of the client.
D. List the other firm in the footnotes to the client's financial statements.
57. When financial statements contain a material, unjustified departure from GAAP, which of the following is
contained in the audit report?
A. A Qualification: Yes; An Explanatory Paragraph After the Opinion Paragraph: No.

B. A Qualification: Yes; An Explanatory Paragraph After the Opinion Paragraph: Yes.
C. A Qualification: No; An Explanatory Paragraph After the Opinion Paragraph: Yes.
D. A Qualification: No; An Explanatory Paragraph After the Opinion Paragraph: No.
58. When the financial statements contain a material departure from GAAP that the auditor believes is justified,
where should the justification appear?
A. In a footnote.
B. In a paragraph added before the scope paragraph.
C. In the opening paragraph.
D. In a paragraph added before the opinion paragraph.
59. Which one of the following is an instance where the auditor would add a paragraph after the opinion
paragraph?
A. There is serious doubt that the client can continue as a going concern.
B. Management's disclosures are not adequate.
C. There are significant uncertainties that are not properly disclosed in the footnotes.
D. There is a material dollar misstatement in the financial statements.
60. A client company has a history of negative cash flow trends and continuing losses. Which type of opinion
will the auditor most likely issue?
A. Adverse.
B. Unqualified with explanatory language.
C. Qualified.
D. Disclaimer of opinion.
61. When the auditor wishes to emphasize a matter in the financial statements, which of the following would the
audit report contain?
62. When the auditor is unable to obtain sufficient appropriate evidence because the client did not allow a
procedure to be completed, which of the following would the report most likely contain?
63. In the audit of consolidated financial statements under U.S. auditing standards when more than one CPA
firm is involved and the principal audit firm chooses to mention the other firm(s), the wording of which
paragraph(s) is modified?
A. Introductory Paragraph: No; Scope Paragraph: No; Opinion Paragraph: Yes.
B. Introductory Paragraph: No; Scope Paragraph: Yes; Opinion Paragraph: Yes.
C. Introductory Paragraph: Yes; Scope Paragraph: Yes; Opinion Paragraph: Yes.
D. Introductory Paragraph: Yes; Scope Paragraph: Yes; Opinion Paragraph: No.
64. Which of the following would not result in an unqualified audit report with an explanatory paragraph?
A. Going concern issue.
B. Scope limitation.
C. Emphasis of a matter.
D. Consistency of presentation.
65. How would the auditor categorize a situation when the financial statements do not contain a footnote the
auditor believes is necessary for fair presentation?
A. A scope limitation.
B. An uncertainty.
C. A departure from GAAP.
D. An act discreditable.
66. In which one of the following cases would an auditor most likely issue a qualified opinion?
A. There is a highly material, and very pervasive departure from SFAS No. 141 and No. 142.
B. There is a change in accounting principles promulgated by the FASB.
C. There is an immaterial dollar misstatement on the financial statements.
D. There is one material departure from GAAP that is affects only two accounts.
67. Qualified opinions can only be issued by auditors for which of the following?
A. Violations of GAAP.
B. Scope limitations.
C. Going concern.
D. Lack of independence.
E. Either A and B.
68. Violations of GAAP resulting in qualified opinions affect the standard audit report through which of the
following?
A. Modifying the scope paragraph.
B. Adding an explanatory paragraph before the opinion paragraph.
C. Modifying the opinion paragraph to read “except for.”
D. Both B and C.
E. All of the above.
69. Which of the following is an example of circumstances that would not limit the audit scope?
A. An inadequacy in the accounting records.
B. The inability to gather sufficient competent evidence.
C. Emphasis of an important matter.
D. The timing of the fieldwork.
70. Which of the following phrases should not be used when the auditor is qualifying the audit opinion?
A. Except for.
B. Subject to.
C. With the exception of.
D. With the qualification of.
71. If a client expensed the acquisition cost of some assets that should have been capitalized and depreciated
them over their useful lives, which of the following would be incorrect?
A. A qualified opinion would be appropriate.
B. The opinion paragraph should be modified to include language such as: “except for the effects of not
capitalizing the acquisition costs of some assets...”
C. An explanatory paragraph should include the effects of the subject matter of the qualification, where
practicable.
D. An explanatory paragraph should be modified to include language such as: “subject to the qualified act...”
72. Adverse opinions can only be issued by auditors based on which of the following?
C. Going concern.
E. Either B or D.
73. Adverse opinions affect the standard audit report in which of the following ways?
C. Modifying the opinion paragraph to read “ does not present fairly.”
D. Both B and C.
74. The opinion paragraph of the audit report for Schnook Co. states that the financial statements "do not
present fairly". Which type of audit report is this?
A. Improper.
B. Adverse.
C. Disclaimer.
D. Qualified.
75. An audit of the Flagler Company, a diamond mining company, brings to light the fact that its equipment has
been marked up to the owners’ expectation of market values. Such a situation will most likely result in which
type of report?
A. Disclaimer.
B. Review.
C. Adverse.
D. Unqualified with explanatory language.
76. In which one of the following instances would an auditor most likely issue an adverse opinion?
A. Management declines to present earnings per share in the income statement.
C. There is a material dollar misstatement that overshadows the overall financial statements.
D. The client does not allow the auditor to send confirmations to its three largest customers.
77. When an auditor is faced with a material departure from GAAP that is pervasive, which of the following
should the audit report contain?
A. An unqualified opinion.
B. A qualified opinion with an explanatory paragraph.
D. A disclaimer of opinion.
78. In which of the following circumstances would an auditor be most likely to express an adverse opinion on a
company’s financial statements?
A. The client has had significant transactions with related entities that the auditor wants to emphasize.
B. The financial statements are not in conformity with FASB requirements regarding the capitalization of leases.
C. The auditor is not independent.
D. There is substantial doubt about the entity’s ability to continue as a going concern.
79. When an auditor issues an adverse opinion, which of the following should be included in the opinion
paragraph?
A. The financial statement effects of the departure from GAAP.
B. A statement that indicates that the financial statements are fairly stated except for a reason that is described in
the separate paragraph.
C. A reference to a separate paragraph that describes the reason for the adverse opinion.
D. The reasons that the financial statements are misleading.
80. In which one of the following instances would an auditor most likely issue a disclaimer of opinion?
A. Management will not sign a management representation letter.
B. Management declines to provide a statement of cash flow.
C. The auditor is independent of the client.
D. The auditor is unable to confirm receivables but performs alternative procedures.
81. In which one of the following instances would an auditor not issue a disclaimer of opinion?
A. The auditors are not invited to the periodic inventory at year end.
B. There are significant misstatements in the financial statements.
D. There is insufficient evidence for the auditor to form an opinion on the fairness of the financial statements.
82. When an auditor lacks independence with respect to a client, which of the following should the auditor
issue?
B. An adverse opinion.
C. A qualified opinion with explanatory paragraph.
D. An unqualified opinion.
83. When the auditor is not independent with respect to a client, what must the auditor do?
A. Not accept an audit engagement.
B. Include a separate paragraph in the audit report stating the lack of independence.
C. Provide a review report.
D. Report the non-compliance to the AICPA.
84. Disclaimers of opinion can only be issued by auditors based on which of the following?
B. Substantial scope limitations.
C. Going concern.
E. Either B or D.
85. Scope limitations resulting in disclaimers under U.S. auditing standards affect the standard audit report
through which of the following?
A. Modifying the introductory paragraph
B. Eliminating the scope paragraph.
C. Adding an explanatory paragraph before the disclaimer paragraph.
D. Both B and C.
86. A justified departure from GAAP may result in which of the following?
A. A disclaimer of an audit opinion.
B. An unqualified audit opinion with an explanatory paragraph either before or after the opinion paragraph.
D. A qualified opinion.
C. An unqualified audit opinion with an explanatory paragraph before the opinion paragraph or a qualified
opinion.
D. A standard unqualified opinion.
88. An emphasis of a matter may result in which of the following?

B. A qualified audit opinion.
D. An unqualified audit opinion with an explanatory paragraph either before or after the opinion paragraph.
89. A reference to another auditor under U.S. auditing standards may result in which of the following?
D. An unqualified audit opinion with modified wording for all three paragraphs.
90. When might an auditor modify the introductory paragraph and replace the scope paragraph with explanatory
paragraph?
A. When a scope limitation exists.
B. When there is substantial doubt about going-concern.
C. When the auditor lacks independence.
D. When there is an emphasis of a matter.
91. PCAOB Auditing Standard 5 does not identify which of the following situations as one in which the auditor
will modify the audit report on ICFR effectiveness?
A. When there is a restriction on the scope of the engagement.
B. When there is other information contained in management's annual report on ICFR.
C. When elements of management's annual report on internal control are incomplete or improperly presented.
D. When the annual report includes a copy of the annual certification pursuant to Section 302 of the Sarbanes-
Oxley Act.
92. When there is a restriction on the scope of the internal control over financial reporting (ICFR) engagement,
what should the auditor do?
A. The auditor will either withdraw from the engagement or disclaim an opinion.
B. The auditor will issue an adverse opinion.
C. The auditor will issue an opinion on the ICFR based on another audit firm’s work.
D. The auditor will report this directly to the Treadway Commission.
93. In which of the following situations would the auditor modify the audit report on ICFR?
A. When the auditor relies on the work of other auditors but decides not to include a reference to the other
auditors.
B. When the auditor is unable to perform all procedures needed to evaluate the internal controls.
C. When the auditor concludes that management’s report on ICFR is not complete or is improperly presented.
D. When the auditor identifies multiple unrelated significant deficiencies in ICFR.
94. When management chooses to include information in its report on ICFR that is in addition to the
information required to be provided, what should the auditor do?
A. The auditor must endorse the information.
B. The auditor must include the information as part of the opinion.
C. The auditor will disclaim an opinion on that additional information.
D. The auditor will present the information in a separate schedule in the footnotes.
95. Types of Audit Opinions
What are the five basic types of financial statement audit reports?
Aloe Products is an online retailer of lotions and other beauty supplies. The company records revenues at the
time that the customer orders are placed on the website, rather than when goods are shipped. Goods are
typically shipped two days after the order is places. The auditor determines that the amount of orders placed but
not shipped as of the balance sheet date is not material.
REQUIRED:
Which type of audit report would you suggest be issued and why?
A CPA, engaged in the audit of financial statements of a large manufacturer with branch offices that are widely
dispersed, is not able to count the substantial undeposited cash receipts at the close of business on the last day of
the fiscal year at all branches. As an alternative to this procedure to verify the accurate cutoff of cash receipts,
the CPA observes that deposits in transit as shown on the year-end bank reconciliation appeared as credits on the
bank statement on the first business day of the New Year. Based on this, the auditor was satisfied as to the cutoff
of cash receipts.
REQUIRED:
Which type of audit report would you suggest be issued this year and why?
98. Unqualified audit reports
For each of the following situations, define the type of problem encountered and provide an explanation as to
the type of report which was issued.
Situation Report Issued

The auditor is unable to confirm three customer accounts receivable. Unqualified Standard
The client forgot to accrue a contingent liability. Unqualified Standard
The auditor believes there is substantial doubt regarding the client's Unqualified with Explanatory Paragraph
ability to continue as a going concern.
The client properly adopts a new accounting principle promulgated by Unqualified with Explanatory Paragraph
the FASB
99. Unqualified reports
Under what circumstances would an auditor issue an unqualified opinion modified by an explanatory
paragraph? Would the paragraph go before or after the opinion paragraph?
A CPA has completed an audit of the financial statements of a long-haul trucking company for the year ended
December 31, 2014. Prior to 2014, the company depreciated its trucks over 10 years. However, during 2014,
the company determined that a more realistic estimated life for its trucks was 8 years and computed the 2014
depreciation on the basis of the revised estimate. The CPA is satisfied that the 8 year estimate is reasonable, but
the change will have a material effect on the comparability of the company’s financial statements. The company
adequately disclosed the change in estimated useful lives of its trucks and the effect of the change on 2014
income in a note to the financial statements.
REQUIRED:
Which type of audit report would you suggest be issued on the 2014 financial statements and why?

Bacon, CPAs, is the principal auditor for Martin Industries, a U.S. public company. However, Bacon decides to
refer to the work of Hsu and Wen, CPAs, who audited a wholly owned subsidiary of the entity and issued an
REQUIRED:
For each of the following independent situations, determine the type of opinion that will most likely be issued
by the firm auditing the financial statements of a U.S. company.
1. The client will not allow the auditor to view the minutes for the entire year under audit and beyond.
2. The auditor finds that the firm is not independent of the client on the last day of fieldwork.
3. The client declines to include a statement of cash flow in the financial statements.
4. The client fails to record an immaterial amount of insurance paid in advance as an asset.
5. The client does not record impairment of goodwill and will not depreciate property and equipment. Both are considered very
material.
6. There is substantial doubt about the client's ability to continue as a going concern.
103. Qualified opinions
Under what circumstances would an auditor issue a qualified opinion?

On January 2, 2014, the Zoom Detail Shoppe received notice from its primary supplier that all wholesale prices
were being increased by 10%, effective immediately. Based on this notice, Zoom revalued is December 31,
2013 inventory to reflect the higher costs. The inventory is a large proportion of the total assets. The effect of
the revaluation was material to current assets, but not to total assets or net income. The increase is adequately
disclosed in the footnotes.
REQUIRED:

Subsequent to the date of the financial statements, as part of post-balance sheet date audit procedures, a CPA
learned that a recent fire caused significant damage to one of the client’s two manufacturing facilities. However,
the loss will not be reimbursed by insurance. Newspapers in the area describe the event in detail and the event is
widely known. The financial statements and related notes as prepared by the client did not disclose the fire loss.
REQUIRED:
For the past five years, Clark CPAs has audited the financial statements of a manufacturing company. During
this period, the audit scope was limited by the client as to the observation of the annual physical inventory.
Because Clark CPAs considers the inventories to be material and was not able to satisfy the audit requirements
by using other auditing procedures, the firm was unable to express an unqualified opinion on the financial
statements in each of the five years.
The CPA was allowed to observe physical inventories for the current year ended December 31, 2014, because
the client’s bank would no longer accept the audit reports. However, to minimize audit fees, the client requested
that the CPA not extend audit procedures to the inventory as of the beginning of the year, January 1, 2014.
REQUIRED:
107. Adverse opinions
Under what circumstances would an auditor issue an adverse opinion?
108. Disclaimers
Discuss what a disclaimer is, when it is issued, and how it would affect the format of a standard three paragraph
audit report.
During the course of an audit of the financial statements of Glover Industries, a CPA is refused permission to
inspect the minutes from the board of directors meetings. The CPA is instead offered a certified copy of all
resolutions and actions involving accounting matters.
REQUIRED:
Chapter 15: Audit Reports on Financial Statements Key
1. For the last several years, both the Financial Accounting Standards Board (FASB) and the International
Auditing and Assurance Standards Board (IAASB) have been considering possible changes to the standard
unqualified audit report.
FALSE
2. The audit report can be a verbal presentation to the audit committee about the client.
FALSE
3. There are no differences in audit report requirements across the standards of the AICPA, PCAOB, and
IAASB.
FALSE
4. The auditor should only provide an opinion on the financial statements if the opinion indicates that the
financial statements are fairly stated in all material respects.
FALSE
5. The audit report delineates the responsibility of client management and that of the audit firm.
TRUE
6. A client that has a departure from generally accepted accounting principles that is immaterial will receive a
qualified or adverse opinion.
FALSE
7. For some engagements, the financial statements might be audited in accordance with multiple auditing
standards.
TRUE
8. When there is an uncertainty surrounding the financial statements, the auditor may still be able to give an
TRUE
9. An important component of an audit report is that the title includes the word “competent.”
FALSE
10. Andrews Corporation adopted an accounting principle that is a material departure from GAAP. The auditor
determined that the financial statements are fairly presented, except for this specifically identifiable GAAP
departure, and therefore would issue a disclaimer of opinion.
FALSE
11. The audit report is modified to five paragraphs as a result of another audit firm performing part of the
financial statement audit.
FALSE
12. A justified departure from GAAP will result in the issuance of an adverse opinion.
FALSE
13. When financial statements contain generally accepted accounting principles in the current year that are
different from the generally accepted accounting principles used in the preceding year, the auditor will typically
make mention of it in the opinion.
TRUE
14. After the balance sheet date but prior to the audit report date the client decides to acquire Bargain Company
to obtain a significant increase in revenues. The auditor would probably give a report that includes the
statement: "except for the acquisition of Bargain Company...".
FALSE
15. An unqualified audit opinion with an explanatory paragraph often makes reference to the footnotes of the
financial statements
TRUE
16. The substantial doubt about an entity's ability to continue as a going concern is a phrase that is used in an
unqualified opinion with a certain type of explanatory language.
TRUE
17. Under international auditing standards, when the audit client has engaged other audit firms to audit remote
locations around the country, the principal auditor must mention the other audit firms in the audit report.
FALSE
18. An auditor is not required to tell the reader of an audit report when there has been a change in accounting
principles that materially affects the financial statements.
FALSE
19. The term "except for" is used in the opinion paragraph of an audit report that will be qualified for a GAAP
violation that is not pervasive.
TRUE
20. A client that treats a material lease transaction as an operating lease when it is in fact a capital lease has
deviated from GAAP and will receive a qualified or adverse opinion.
TRUE
21. Restrictions on the scope of the audit whether imposed by the client or circumstances may require the
auditor to issue either a qualified or an adverse opinion.
FALSE
22. For a change in accounting principles that management does not justify to the auditor, the auditor will likely
choose between a qualified and an adverse opinion.
TRUE
23. Inconsistent application of accounting principles by the client is a GAAP violation and would result in a
qualified audit report.
FALSE
24. Uncertainties, such as doubt about the going concern of a client, may result in an adverse opinion.
FALSE
25. If the auditor concludes that the financial statements taken as a whole are not fairly presented, the auditor
should issue an adverse opinion.
TRUE
26. If scope limitations that are not client-imposed exist make it impossible for the auditor to form an opinion,
the auditor should render an adverse opinion.
FALSE
27. The failure of a client to include a statement of cash flows will result in the issuance of a disclaimer of
opinion by the auditor.
FALSE
28. When the auditor is unable to obtain sufficient, appropriate evidence concerning the beginning inventory,
which is material, the report is modified by adding an explanatory paragraph prior to the opinion paragraph and
appropriate modification to the scope paragraph.
FALSE
29. The client will not allow Collier and Company, CPAs to read the minutes of the board of director's meetings
that occurred during the year under audit. Such a limitation will usually result in the auditor issuing a
disclaimer.
TRUE
30. If the firm auditing a company realizes that it is not independent with respect to the client, it will issue
disclaimer of opinion based on the inherent GAAP violation imposed by the audit firm.
FALSE
31. For a client with serious going concern issues the auditor has to make a choice between issuing an
unqualified audit report with an explanatory paragraph or a disclaimer.
TRUE
32. An auditor can issue a disclaimer of opinion because of an inability to obtain sufficient appropriate
evidence.
TRUE
33. When circumstances preclude an auditor from performing certain procedures and the auditor can be satisfied
using other alternative procedures, a disclaimer of opinion will be rendered.
FALSE
34. The scope paragraph of an unqualified opinion primarily provides information relating to the division of
responsibilities.
FALSE
35. Because of its importance, the decision about what type of opinion to issue is often made after consultation
with other professionals within the firm.
TRUE
36. If a significant scope limitation is imposed by the client, a disclaimer should ordinarily be issued.
TRUE
37. The most difficult decisions about which opinion to issue are generally centered around decisions based on
the materiality level and pervasiveness of GAAP violations, the significance of scope limitations, and the
likelihood of the entity being a going concern.
TRUE
38. The auditor is only concerned about the aggregate internal control deficiencies when determining the
appropriate opinion on internal control over financial reporting (ICFR).
FALSE
39. The auditor will issue an unqualified opinion on ICFR if the auditor has identified only one material
weakness in ICFR.
FALSE
40. The auditor will modify the audit report on ICFR effectiveness when management's annual certification
pursuant to Section 302 of the Sarbanes-Oxley Act is misstated.
TRUE
41. If the auditor determines that management’s annual report on internal controls is incomplete or not properly
presented, the auditor’s report will include an explanatory paragraph that describes the reasons for this
determination.
TRUE
42. The decision about whether to make reference to another auditor in the report on the audit of ICFR does not
differ from the corresponding decision as it relates to the audit of the financial statements.
FALSE
43. Auditing reporting standards for financial statement and integrated audits require auditors to provide which
of the following?
A. Positive assurance.
B. Negative assurance.
C. Materiality assurance.
D. No assurance.
44. Which of the following is a change that is not being debated by auditing standard setters and investors?
A. Adding disclosure about which engagement partner at the firm supervised the audit and who from outside the
audit firm participated in the audit
B. Adding commentary on areas of risk of material misstatement of the financial statements identified by the
auditor.
C. Adding commentary about the level of materiality applied by the auditor to perform the audit.
D. All of the above are being debated.
45. According to the AICPA, the auditor needs to form an opinion on the financial statements based on an
evaluation of the audit evidence obtained. This is stated in which AICPA principle governing an audit conducted
in accordance with GAAS?
A. Principle 1
B. Principle 4
C. Principle 5
D. Principle 7
46. According to the AICPA, the auditor needs to clearly express an opinion based on audit evidence obtained in
the form of a written report.This is stated in which AICPA principle governing an audit conducted in accordance
with GAAS?
A. Principle 1
B. Principle 4
C. Principle 5
D. Principle 7
47. According to the AICPA principles, which of the following is incorrect?

A. If the auditor has reservations about the fairness of financial statement presentation, the reason(s) must be
stated in the auditor’s report.
B. If there is a material departure from GAAP in the financial statements, the auditor should explicitly state the
nature of the departure and the dollar effects where determinable.
C. Auditors should state the reasons why an unqualified opinion cannot be issued.
D. Auditors should issue an unqualified opinion in all cases where companies have provided an entire set of
financial statements and footnotes that include all years presented for comparative purposes.
48. Which one of the following is not a type of unqualified audit opinion issued by auditors?
A. Standard with three paragraphs.
B. Includes explanatory paragraph.
C. Includes modifications.
D. Does not include the opinion paragraph.
49. Which one of the following is an example of the contents of an opinion paragraph found in an audit report?
A. "We have audited...."
B. "Nothing came to our attention..."
C. "The financial statements referred to above present fairly,..."
D. "An audit includes examining, on a test basis..."
50. In which one of the following instances would an auditor most likely issue a standard unqualified opinion
without explanatory language?
A. Management's disclosures are missing or inadequate.
D. There is an immaterial deviation from GAAP related to capitalizing repairs.
51. The division of responsibility between the reporting company's management and the audit firm is described
in which one of the following?
A. Scope paragraph.
B. Introductory paragraph.
C. Notes to the financial statements.
D. Opinion paragraph.
52. If the auditor believes that there is a remote probability that resolution of an uncertainty will have a material
effect on the financial statements, which of the following would the auditor issue?
B. A standard unqualified opinion.
D. An unqualified opinion with explanatory paragraphs.
53. The scope paragraph of an unqualified opinion primarily gives information relating to which of the
following?
A. The division of responsibilities.
B. The final assessment of a company’s standings with the audit firm.
C. The statements and dates under audit.
D. Audit planning and procedure.
54. Audit reports are designed to promote clear communication between the auditor and the financial statement
user. Which of the following is not delineated in the audit report?
A. What was audited and the relative responsibilities of the client and the auditor.
B. The experience level of the audit team.
C. The nature of the audit opinion formulation process.
D. The auditor’s opinion on the fairness of the financial statements.
55. If the auditor decides to draw attention to large related party transactions occurring in the financial
statements of the client, which report will most likely be issued?
A. Qualified.
B. Unqualified with an explanatory paragraph
C. Adverse.
D. Consolidation.
56. The use of another CPA firm by an audit firm to perform part of the engagement on a client's subsidiary will
require the audit firm to do which of the following?
A. Merge with the other CPA firm.
B. Perform a peer review on the other CPA firm.
C. Ensure the independence of the other CPA firm of the client.
D. List the other firm in the footnotes to the client's financial statements.
57. When financial statements contain a material, unjustified departure from GAAP, which of the following is
contained in the audit report?

58. When the financial statements contain a material departure from GAAP that the auditor believes is justified,
where should the justification appear?
A. In a footnote.
B. In a paragraph added before the scope paragraph.
C. In the opening paragraph.
D. In a paragraph added before the opinion paragraph.
59. Which one of the following is an instance where the auditor would add a paragraph after the opinion
paragraph?
A. There is serious doubt that the client can continue as a going concern.
B. Management's disclosures are not adequate.
C. There are significant uncertainties that are not properly disclosed in the footnotes.
D. There is a material dollar misstatement in the financial statements.
60. A client company has a history of negative cash flow trends and continuing losses. Which type of opinion
will the auditor most likely issue?
A. Adverse.
B. Unqualified with explanatory language.
C. Qualified.
D. Disclaimer of opinion.
61. When the auditor wishes to emphasize a matter in the financial statements, which of the following would the
audit report contain?
62. When the auditor is unable to obtain sufficient appropriate evidence because the client did not allow a
procedure to be completed, which of the following would the report most likely contain?
63. In the audit of consolidated financial statements under U.S. auditing standards when more than one CPA
firm is involved and the principal audit firm chooses to mention the other firm(s), the wording of which
paragraph(s) is modified?
A. Introductory Paragraph: No; Scope Paragraph: No; Opinion Paragraph: Yes.
B. Introductory Paragraph: No; Scope Paragraph: Yes; Opinion Paragraph: Yes.
C. Introductory Paragraph: Yes; Scope Paragraph: Yes; Opinion Paragraph: Yes.
D. Introductory Paragraph: Yes; Scope Paragraph: Yes; Opinion Paragraph: No.
64. Which of the following would not result in an unqualified audit report with an explanatory paragraph?
A. Going concern issue.
B. Scope limitation.
C. Emphasis of a matter.
D. Consistency of presentation.
65. How would the auditor categorize a situation when the financial statements do not contain a footnote the
auditor believes is necessary for fair presentation?
A. A scope limitation.
B. An uncertainty.
C. A departure from GAAP.
D. An act discreditable.
66. In which one of the following cases would an auditor most likely issue a qualified opinion?
A. There is a highly material, and very pervasive departure from SFAS No. 141 and No. 142.
B. There is a change in accounting principles promulgated by the FASB.
C. There is an immaterial dollar misstatement on the financial statements.
D. There is one material departure from GAAP that is affects only two accounts.
67. Qualified opinions can only be issued by auditors for which of the following?
C. Going concern.
E. Either A and B.
68. Violations of GAAP resulting in qualified opinions affect the standard audit report through which of the
following?
C. Modifying the opinion paragraph to read “except for.”
D. Both B and C.
69. Which of the following is an example of circumstances that would not limit the audit scope?
A. An inadequacy in the accounting records.
B. The inability to gather sufficient competent evidence.
C. Emphasis of an important matter.
D. The timing of the fieldwork.
70. Which of the following phrases should not be used when the auditor is qualifying the audit opinion?
A. Except for.
B. Subject to.
C. With the exception of.
D. With the qualification of.
71. If a client expensed the acquisition cost of some assets that should have been capitalized and depreciated
them over their useful lives, which of the following would be incorrect?
A. A qualified opinion would be appropriate.
B. The opinion paragraph should be modified to include language such as: “except for the effects of not
capitalizing the acquisition costs of some assets...”
C. An explanatory paragraph should include the effects of the subject matter of the qualification, where
practicable.
D. An explanatory paragraph should be modified to include language such as: “subject to the qualified act...”
72. Adverse opinions can only be issued by auditors based on which of the following?
C. Going concern.
E. Either B or D.
73. Adverse opinions affect the standard audit report in which of the following ways?
C. Modifying the opinion paragraph to read “ does not present fairly.”
D. Both B and C.
74. The opinion paragraph of the audit report for Schnook Co. states that the financial statements "do not
present fairly". Which type of audit report is this?
A. Improper.
B. Adverse.
C. Disclaimer.
D. Qualified.
75. An audit of the Flagler Company, a diamond mining company, brings to light the fact that its equipment has
been marked up to the owners’ expectation of market values. Such a situation will most likely result in which
type of report?
A. Disclaimer.
B. Review.
C. Adverse.
D. Unqualified with explanatory language.
76. In which one of the following instances would an auditor most likely issue an adverse opinion?
A. Management declines to present earnings per share in the income statement.
C. There is a material dollar misstatement that overshadows the overall financial statements.
D. The client does not allow the auditor to send confirmations to its three largest customers.
77. When an auditor is faced with a material departure from GAAP that is pervasive, which of the following
should the audit report contain?
A. An unqualified opinion.
B. A qualified opinion with an explanatory paragraph.
D. A disclaimer of opinion.
78. In which of the following circumstances would an auditor be most likely to express an adverse opinion on a
company’s financial statements?
A. The client has had significant transactions with related entities that the auditor wants to emphasize.
B. The financial statements are not in conformity with FASB requirements regarding the capitalization of leases.
C. The auditor is not independent.
D. There is substantial doubt about the entity’s ability to continue as a going concern.
79. When an auditor issues an adverse opinion, which of the following should be included in the opinion
paragraph?
A. The financial statement effects of the departure from GAAP.
B. A statement that indicates that the financial statements are fairly stated except for a reason that is described in
the separate paragraph.
C. A reference to a separate paragraph that describes the reason for the adverse opinion.
D. The reasons that the financial statements are misleading.
80. In which one of the following instances would an auditor most likely issue a disclaimer of opinion?
A. Management will not sign a management representation letter.
B. Management declines to provide a statement of cash flow.
C. The auditor is independent of the client.
D. The auditor is unable to confirm receivables but performs alternative procedures.
81. In which one of the following instances would an auditor not issue a disclaimer of opinion?
A. The auditors are not invited to the periodic inventory at year end.
B. There are significant misstatements in the financial statements.
D. There is insufficient evidence for the auditor to form an opinion on the fairness of the financial statements.
82. When an auditor lacks independence with respect to a client, which of the following should the auditor
issue?
C. A qualified opinion with explanatory paragraph.
D. An unqualified opinion.
83. When the auditor is not independent with respect to a client, what must the auditor do?
A. Not accept an audit engagement.
B. Include a separate paragraph in the audit report stating the lack of independence.
C. Provide a review report.
D. Report the non-compliance to the AICPA.
84. Disclaimers of opinion can only be issued by auditors based on which of the following?
B. Substantial scope limitations.
C. Going concern.
E. Either B or D.
85. Scope limitations resulting in disclaimers under U.S. auditing standards affect the standard audit report
through which of the following?
A. Modifying the introductory paragraph
B. Eliminating the scope paragraph.
C. Adding an explanatory paragraph before the disclaimer paragraph.
D. Both B and C.
B. An unqualified audit opinion with an explanatory paragraph either before or after the opinion paragraph.
D. A qualified opinion.
C. An unqualified audit opinion with an explanatory paragraph before the opinion paragraph or a qualified
opinion.
D. A standard unqualified opinion.
88. An emphasis of a matter may result in which of the following?

D. An unqualified audit opinion with an explanatory paragraph either before or after the opinion paragraph.
89. A reference to another auditor under U.S. auditing standards may result in which of the following?
D. An unqualified audit opinion with modified wording for all three paragraphs.
90. When might an auditor modify the introductory paragraph and replace the scope paragraph with explanatory
paragraph?
A. When a scope limitation exists.
B. When there is substantial doubt about going-concern.
C. When the auditor lacks independence.
D. When there is an emphasis of a matter.
91. PCAOB Auditing Standard 5 does not identify which of the following situations as one in which the auditor
will modify the audit report on ICFR effectiveness?
A. When there is a restriction on the scope of the engagement.
B. When there is other information contained in management's annual report on ICFR.
C. When elements of management's annual report on internal control are incomplete or improperly presented.
D. When the annual report includes a copy of the annual certification pursuant to Section 302 of the Sarbanes-
Oxley Act.
92. When there is a restriction on the scope of the internal control over financial reporting (ICFR) engagement,
what should the auditor do?
A. The auditor will either withdraw from the engagement or disclaim an opinion.
B. The auditor will issue an adverse opinion.
C. The auditor will issue an opinion on the ICFR based on another audit firm’s work.
D. The auditor will report this directly to the Treadway Commission.
93. In which of the following situations would the auditor modify the audit report on ICFR?
A. When the auditor relies on the work of other auditors but decides not to include a reference to the other
auditors.
B. When the auditor is unable to perform all procedures needed to evaluate the internal controls.
C. When the auditor concludes that management’s report on ICFR is not complete or is improperly presented.
D. When the auditor identifies multiple unrelated significant deficiencies in ICFR.
94. When management chooses to include information in its report on ICFR that is in addition to the
information required to be provided, what should the auditor do?
A. The auditor must endorse the information.
B. The auditor must include the information as part of the opinion.
C. The auditor will disclaim an opinion on that additional information.
D. The auditor will present the information in a separate schedule in the footnotes.
What are the five basic types of financial statement audit reports?
Audit reports can be:

1. Standard unqualified report
2. Unqualified report with an explanatory paragraph
3. Qualified report
4. Adverse report
5. Disclaimer of opinion report
Aloe Products is an online retailer of lotions and other beauty supplies. The company records revenues at the
time that the customer orders are placed on the website, rather than when goods are shipped. Goods are
typically shipped two days after the order is places. The auditor determines that the amount of orders placed but
not shipped as of the balance sheet date is not material.
REQUIRED:
Which type of audit report would you suggest be issued and why?
Although the client is not following GAAP on revenue recognition, the amount is immaterial. Therefore, the
standard unqualified report would be the most probable type of report to issue.
A CPA, engaged in the audit of financial statements of a large manufacturer with branch offices that are widely
dispersed, is not able to count the substantial undeposited cash receipts at the close of business on the last day of
the fiscal year at all branches. As an alternative to this procedure to verify the accurate cutoff of cash receipts,
the CPA observes that deposits in transit as shown on the year-end bank reconciliation appeared as credits on the
bank statement on the first business day of the New Year. Based on this, the auditor was satisfied as to the cutoff
of cash receipts.
REQUIRED:
Because the auditor was able to obtain alternative evidence, no scope qualification is necessary. If there were
such a qualification, it would be a qualified scope and opinion or a disclaimer, depending on materiality.
However, in this case, it appears as if an unqualified opinion with standard wording is most likely.
98. Unqualified audit reports
For each of the following situations, define the type of problem encountered and provide an explanation as to
the type of report which was issued.
Situation Report Issued

The auditor is unable to confirm three customer accounts receivable. Unqualified Standard
The client forgot to accrue a contingent liability. Unqualified Standard
The auditor believes there is substantial doubt regarding the client's Unqualified with Explanatory Paragraph
ability to continue as a going concern.
The client properly adopts a new accounting principle promulgated by Unqualified with Explanatory Paragraph
the FASB
Type of Problem Issues Giving Rise to Report
Scope limitation Alternative procedures probably performed.
GAAP violation Most likely immaterial or the client adjusted the financial statements to
appropriately reflect the contingency.
Going concern Probably not a significant enough uncertainty to give rise to disclaimer.
Change in accounting principle in accordance with GAAP. Adequate GAAP treatment. Auditor draws attention to the change.
99. Unqualified reports
Under what circumstances would an auditor issue an unqualified opinion modified by an explanatory
paragraph? Would the paragraph go before or after the opinion paragraph?
An explanatory paragraph would be added to an otherwise unqualified report when:
· The client has changed an accounting principle or method of application that has a material effect on the financial statements, but such
change is in accordance with GAAP.
· A justified departure from GAAP.
· The auditor has significant doubt about whether the client can continue as a going concern.
· The auditor wishes to emphasize some matter.
For consistency, going concern, and for emphasis of a matter, such as an uncertainty, the explanatory paragraph would go after the opinion paragraph,
while for justified departure from GAAP the explanatory paragraph can go before or after the opinion paragraph.
A CPA has completed an audit of the financial statements of a long-haul trucking company for the year ended
December 31, 2014. Prior to 2014, the company depreciated its trucks over 10 years. However, during 2014,
the company determined that a more realistic estimated life for its trucks was 8 years and computed the 2014
depreciation on the basis of the revised estimate. The CPA is satisfied that the 8 year estimate is reasonable, but
the change will have a material effect on the comparability of the company’s financial statements. The company
adequately disclosed the change in estimated useful lives of its trucks and the effect of the change on 2014
income in a note to the financial statements.
REQUIRED:
Which type of audit report would you suggest be issued on the 2014 financial statements and why?
The auditor should issue an unqualified standard audit report with an explanatory paragraph following the
opinion paragraph without modifying the three standard paragraphs. This is because there is a lack of
consistency, since there is a change of estimated life that results in a material effect as far as comparability and
is not a change in accounting principles. As the scenario notes, adequate disclosure is provided.
Bacon, CPAs, is the principal auditor for Martin Industries, a U.S. public company. However, Bacon decides to
refer to the work of Hsu and Wen, CPAs, who audited a wholly owned subsidiary of the entity and issued an
REQUIRED:
Since the principal audit firm chooses to mention the other firm in the audit report, the wording of the standard
unqualified report is modified, and no additional paragraph is needed. The resulting opinion is unqualified
unless there are other reasons for expressing a different opinion. The most extensive change appears in the
introductory paragraph to indicate the shared responsibility for the overall opinion, including the magnitude of
the amounts audited by the other firm. The scope and opinion paragraphs are also modified to reference the
other auditor.
For nonpublic clients, the extensive change would appear in the auditor’s responsibility section; and the opinion
paragraph would include a reference to the other auditor.
The name of the other audit firm is mentioned only with its express permission and if its report is also included
in the document.

For each of the following independent situations, determine the type of opinion that will most likely be issued
by the firm auditing the financial statements of a U.S. company.
1. The client will not allow the auditor to view the minutes for the entire year under audit and beyond.
2. The auditor finds that the firm is not independent of the client on the last day of fieldwork.
3. The client declines to include a statement of cash flow in the financial statements.
4. The client fails to record an immaterial amount of insurance paid in advance as an asset.
5. The client does not record impairment of goodwill and will not depreciate property and equipment. Both are considered very
material.
6. There is substantial doubt about the client's ability to continue as a going concern.
1. Qualified or Disclaimer of opinion (although most auditors will disclaim a client imposed scope limitation).
2. Disclaimer of opinion for the auditor's impaired independence.
3. Qualified opinion because of the GAAP violation that does not overshadow the remainder of the financial statements.
4. Unqualified opinion with no modifications due to immateriality.
5. Most likely adverse due to the extent of materiality and the pervasiveness to the financial statements.
6. Most likely unqualified with an explanatory paragraph. In some reporting situations, doubt about the client continuing as a going
concern is such that the auditor does not believe that an additional paragraph to an unqualified opinion is appropriate.
103. Qualified opinions
Under what circumstances would an auditor issue a qualified opinion?
The auditor would be likely to issue a qualified opinion when the auditor has completed the audit and has
concluded that the financial statements, taken as a whole, are fairly stated except for the following situations:
· There is a material, unjustified departure from GAAP, but the auditor believes that the financial statements taken as a whole are fairly
presented except for this specifically identifiable GAAP departure. Not overshadowing to the remainder of financial statement.
· Management's disclosures are not adequate, but the lack of disclosure is not pervasive.
· The auditor has conducted the audit and is unable to obtain sufficient appropriate evidence on a particular area because of scope limitations
or the lack of such evidence. (Not significant enough to render disclaimer of opinion).

On January 2, 2014, the Zoom Detail Shoppe received notice from its primary supplier that all wholesale prices
were being increased by 10%, effective immediately. Based on this notice, Zoom revalued is December 31,
2013 inventory to reflect the higher costs. The inventory is a large proportion of the total assets. The effect of
the revaluation was material to current assets, but not to total assets or net income. The increase is adequately
disclosed in the footnotes.
REQUIRED:
This is a failure to follow GAAP and a qualified opinion should be issued. Zoom Detail Shoppe has used a
replacement cost inventory approach rather than a lower of cost or market approach. It is most likely not
sufficiently material to require an adverse opinion.

Subsequent to the date of the financial statements, as part of post-balance sheet date audit procedures, a CPA
learned that a recent fire caused significant damage to one of the client’s two manufacturing facilities. However,
the loss will not be reimbursed by insurance. Newspapers in the area describe the event in detail and the event is
widely known. The financial statements and related notes as prepared by the client did not disclose the fire loss.
REQUIRED:
Disclosure of this information is required in a footnote. According to the information, this event is highly
material or material, depending upon the amount of the loss and the auditor's preliminary judgment about
materiality. Failure to disclose the event is a violation of GAAP and is likely to result in a qualified opinion, or
it could be so material that it requires an adverse opinion.
For the past five years, Clark CPAs has audited the financial statements of a manufacturing company. During
this period, the audit scope was limited by the client as to the observation of the annual physical inventory.
Because Clark CPAs considers the inventories to be material and was not able to satisfy the audit requirements
by using other auditing procedures, the firm was unable to express an unqualified opinion on the financial
statements in each of the five years.
The CPA was allowed to observe physical inventories for the current year ended December 31, 2014, because
the client’s bank would no longer accept the audit reports. However, to minimize audit fees, the client requested
that the CPA not extend audit procedures to the inventory as of the beginning of the year, January 1, 2014.
REQUIRED:
The scope of the audit has been restricted by inability to assess the inventory. Based on the information, this
appears to be highly material or material, depending upon the auditor’s preliminary judgment about materiality.
Because the auditor was unable to obtain sufficient appropriate evidence on the beginning inventories, it would
be necessary to issue either a qualified or disclaimer of opinion on the income statement and statement of cash
flows as well as the beginning of the year balance sheet. The choice of a qualified or disclaimer opinion would
depend upon materiality. If highly material, then a disclaimer is the best choice. If material, then a qualified
scope and opinion might be more appropriate. An unqualified opinion could be issued for the current period
balance sheet.
107. Adverse opinions
Under what circumstances would an auditor issue an adverse opinion?
The auditor would be likely to issue an adverse opinion when the auditor has finished the audit and has
concluded that the financial statements, taken as a whole, are very materially misstated and therefore, taken as a
whole, are not fairly presented due to:
· material departures from GAAP that pervade the financial statements.

· a lack of important disclosures that is pervasive, as this is a departure from GAAP.
The GAAP deviation is typically pervasive to the entire financial statement when an adverse opinion is issued.
108. Disclaimers
Discuss what a disclaimer is, when it is issued, and how it would affect the format of a standard three paragraph
audit report.
A disclaimer may be issued for a pervasive scope limitation or for lack of independence of the practitioner. A
disclaimer basically says that the practitioner performed no procedures and provides no assurances on the
financial statements. In some cases, a disclaimer will be issued when there is substantial doubt about the client
being a going concern.
When the CPA is not independent of the client, professional standards forbid any expression of assurance by the
auditor on the financial statements. Lack of independence results in a one paragraph disclaimer stating that the
practitioner is not independent with respect to the client and did not audit the financial statements and does not
express any opinion on the financial statements.
Scope limitations result from the inability to gather sufficient evidence to express an opinion and may result
from the client’s actions or the situation. When imposed by the client or when the client has a pervasive scope
limitation, such as the practitioner not being able to observe ending inventory because of when the engagement
started, then the practitioner normally issues a disclaimer. If the scope limitation is not imposed by the client
and is limited then the practitioner usually expresses a qualified opinion.
The effect on the standard three-paragraph audit report is to change the wording of the introductory paragraph,
eliminate the scope paragraph, add an explanatory paragraph discussing the scope limitation and its
approximate effects, followed by a disclaimer paragraph stating that the practitioner was not able to perform
sufficient work and so does not express an opinion on the financial statements.

During the course of an audit of the financial statements of Glover Industries, a CPA is refused permission to
inspect the minutes from the board of directors meetings. The CPA is instead offered a certified copy of all
resolutions and actions involving accounting matters.
REQUIRED:
The auditor should issue a disclaimer of opinion. Failure of the client to allow the auditor to inspect the minutes
of board meetings would be a material client-imposed restriction. Due to the importance of the minutes, a
disclaimer would be necessary. The certified copy of all resolutions and actions is not a satisfactory alternative
procedure.

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Chapter 15: Audit Reports on Financial Statements Chapter 15: Audit Reports on

47. According to the AICPA principles, which of the following is incorrect?

A. A Qualification: Yes; An Explanatory Paragraph After the Opinion Paragraph: No.

88. An emphasis of a matter may result in which of the following?

95. Types of Audit Opinions

97. Types of Audit Opinions

Situation Report Issued

99. Unqualified reports

101. Types of Audit Opinions

103. Qualified opinions

Under what circumstances would an auditor issue a qualified opinion?

105. Types of Audit Opinions

107. Adverse opinions

Under what circumstances would an auditor issue an adverse opinion?

47. According to the AICPA principles, which of the following is incorrect?

A. A Qualification: Yes; An Explanatory Paragraph After the Opinion Paragraph: No.

88. An emphasis of a matter may result in which of the following?

95. Types of Audit Opinions

Audit reports can be:

97. Types of Audit Opinions

98. Unqualified audit reports

Situation Report Issued

99. Unqualified reports

An explanatory paragraph would be added to an otherwise unqualified report when:

100. Types of Audit Opinions

102. Types of Audit Opinions

Under what circumstances would an auditor issue a qualified opinion?

104. Types of Audit Opinions

105. Types of Audit Opinions

107. Adverse opinions

Under what circumstances would an auditor issue an adverse opinion?

· material departures from GAAP that pervade the financial statements.

109. Types of Audit Opinions

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