Multiple Choice

1. In which of the following situations would an auditor ordinarily issue an unqualified/ unmodified financial statement audit opinion with no explanatory ( or emphasis- of- matter/ other- matter) paragraph?

a. The auditor wishes to emphasize that the entity had significant related-party transactions.

b. The auditor decides to refer to the report of another auditor as a basis, in part, for the auditor’s opinion.

c. The entity issues financial statements that present financial position and results of operations but omits the statement of cash flows.

d. The auditor has substantial doubt about the entity’s ability to continue as a going concern, but the circumstances are fully disclosed in the financial statements.

2. A public entity changed from the straight- line method to the declining balance method of depreciation for all newly acquired assets. This change has no material effect on the current year’s financial statements but is reasonably certain to have a substantial effect in later years. The client’s financial statements contain no material misstatements and the auditor concurs with this change. If the change is disclosed in the notes to the financial statements, the auditor should issue a report with a ( n)

a. “ Except for” qualified opinion.

b. Explanatory paragraph.

c. Unqualified opinion.

d. Consistency modification.

3. An auditor includes a separate paragraph in an otherwise unmodified financial statement audit report to emphasize that the entity being reported upon had significant transactions with related parties. The inclusion of this separate paragraph

a. Is appropriate and would not negate the unmodified opinion.

b. Is considered an “ except for” qualification of the opinion.

c. Violates generally accepted auditing standards if this information is already disclosed in footnotes to the financial statements.

d. Necessitates a revision of the opinion paragraph to include the phrase “ with the foregoing explanation.”

4. Eagle Company, a public company, had a computer failure and lost part of its financial data. As a result, the auditor was unable to obtain sufficient audit evidence relating to Eagle’s inventory account. Assuming the inventory account is at least material, the auditor would most likely choose either

a. A qualified opinion or a disclaimer of opinion.

b. A qualified opinion or an adverse opinion.

c. An unqualified opinion with no explanatory paragraph or an unqualified opinion with an explanatory paragraph.

d. A qualified opinion with no explanatory paragraph or a qualified opinion with an explanatory paragraph.

5. Tech Company has disclosed an uncertainty due to pending litigation. The auditor’s decision to issue a qualified opinion on Tech’s financial statements would most likely result from

a. A lack of sufficient evidence.

b. An inability to estimate the amount of loss.

c. The entity’s lack of experience with such litigation.

d. A lack of insurance coverage for possible losses from such litigation.

6. In which of the following circumstances would an auditor usually choose between issuing a qualified opinion or a disclaimer of opinion on a client’s financial statements?

a. Departure from generally accepted accounting principles.

b. Inadequate disclosure of accounting policies.

c. Inability to obtain sufficient competent evidence.

d. Unreasonable justification for a change in accounting principle.

7. King, CPA, was engaged to audit the financial statements of Chang Company, a private company, after its fiscal year had ended. King neither observed the inventory count nor confirmed the receivables by direct communication with debtors but was satisfied that both were fairly stated after applying appropriate alternative procedures. King’s financial statement audit report most likely contained a( n)

a. Qualified opinion.

b. Disclaimer of opinion.

c. Unmodified opinion.

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

8. Comparative financial statements for a public company include the prior year’s statements, which were audited by a predecessor auditor. The predecessor’s report is not presented along with the comparative financial statements. If the predecessor’s report was unqualified, the successor should

a. Express an opinion on the current year’s statements alone and make no reference to the prior year’s statements.

b. Indicate in the auditor’s report that the predecessor auditor expressed an unqualified opinion.

c. Obtain a letter of representations from the predecessor concerning any matters that might affect the successor’s opinion.

d. Request that the predecessor auditor reissue the prior year’s report.

9. When reporting on comparative financial statements for a private com-pany, which of the following circumstances should ordinarily cause the auditor to change the previously issued opinion on the prior year’s financial statements?

a. The prior year’s financial statements are restated following the purchase of another company in the current year.

b. A departure from generally accepted accounting principles caused an adverse opinion on the prior year’s financial statements, and those state-ments have been properly restated.

c. A change in accounting principle causes the auditor to make a consistency modification in the current year’s audit report.

d. A scope limitation caused a qualified opinion on the prior year’s financial statements, but the current year’s opinion is properly unmodified.

10. Which of the following best describes the auditor’s responsibility for “ other information” included in the annual report to stockholders that contains financial statements and the auditor’s report?

a. The auditor has no obligation to read the “other information.”

b. The auditor has no obligation to corroborate the “other information” but should read the “other information” to determine whether it is materially inconsistent with the financial statements.

c. The auditor should extend the examination to the extent necessary to verify the “other information.”

d. The auditor must modify the auditor’s report to state that the other information “is unaudited” or “is not covered by the auditor’s report.”

11. When reporting on financial statements prepared on the basis of accounting used for income tax purposes, the auditor should include in the report a paragraph that

a. Emphasizes that the financial statements have not been examined in accordance with generally accepted auditing standards.

b. Refers to the authoritative pronouncements that explain the income tax basis of accounting being used.

c. States that the income tax basis of accounting is a basis of accounting other than generally accepted accounting principles.

d. Justifies the use of the income tax basis of accounting.

12 When an auditor is asked to express an opinion on an entity’s rent and roy-alty revenues, he or she may

a. Not accept the engagement because to do so would be tantamount to agreeing to issue a piecemeal opinion.

b. Not accept the engagement unless also engaged to audit the full financial statements of the entity.

c. Accept the engagement, provided the auditor’s opinion is expressed in a special report.

d. Accept the engagement, provided distribution of the auditor’s report is limited to the entity’s management.