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Chapter 10 Audit Reports

NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES

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409 views7 pages

Chapter 10 Audit Reports

NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES

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Steffany Roque
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APPLIED AUDITING

CHAPTER 10
AUDIT REPORTS

Objective
1. Theory for Audit Reports

Select the best answer for each of the following:

1.Which of the following is not among the ideas stated in the standard audit
report?
a.We made an examination according to GAAS.
b.We made tests of the accounting records.
c.The statements are fairly presented in conformity with GAAP.
d.We certify the accuracy of the statements.

2.Which of the following statements is correct?


a.An auditor’s responsibility to express an opinion on the financial statements
is explicitly represented in the opening paragraph of the auditor’s standard
report.
b.An auditor’s responsibility to express an opinion on the financial statements
is explicitly represented in the opinion paragraph of the auditor’s standard
report.
c.An auditor’s responsibility to express an opinion on the financial statements
is explicitly represented in the scope paragraph of the auditor’s standard
report.
d.An auditor’s responsibility to express an opinion on the financial statements
is implicitly represented in the auditor’s standard report.

3.The existence of audit risk is recognized by the statement in the auditor’s


standard report that the
APPLIED AUDITING

a.Auditor obtains reasonable assurance about whether the financial


statements are free of material misstatement.
b.Auditor is responsible for expressing an opinion on the financial statements,
which are the responsibility of management.
c.Audits include examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements.
d.Financial statements are presented fairly, in all material aspects, in
conformity with GAAP.

4.The phrase "present fairly ... in conformity with GAAP" appears in the
standard audit report. Unless modified, this phrase implies that all of the
following conditions have been met, except:
a.The financial statements are informative on matters that may affect their use,
understanding, and interpretation.
b.The accounting principles selected and applied have all been promulgated
by the Accounting Standards Council.
c.The information presented in financial statements is classified and
summarized in a reasonable manner.
d.Comparability of financial statements between periods has not been
materially affected by changes in accounting principles.

5.If the auditor has no reservations concerning the fairness of the financial
statements, the auditor should issue a (an)
a. Unqualified opinion.c. Disclaimer of opinion.
b. Qualified opinion. d. Adverse opinion.

6.When an independent auditor expresses an unqualified opinion he asserts


that:
(1)He performed the audit in accordance with generally accepted auditing
standards.
(2)The company is a profitable and viable entity.
(3)The financial statements examined are in conformity with GAAP.
(4)The financial statements are accurate and free of errors.

a.All of the above statements are true.


b.All of the above statements are false.
c.Only statements (1) and (3) are true.
d.Only statements (2) and (4) are true.

7.Under which of the following circumstances would an auditor not be required


to depart from the wording of the standard audit report?
a.The client does not want to prepare a statement of changes in financial
position.
b.The client did not allow the CPA to review the minutes of stockholders'
meetings.
c.The client did not allow confirmation of receivables, the CPA applied
alternative auditing procedures and was satisfied as to the receivables.
d.The client does not want to disclose damage to enterprise property caused
by fire which took place after the balance sheet date.
APPLIED AUDITING

8.In which of the following circumstances may the auditor issue an unqualified
standard audit report?
a.There has been a departure from GAAP.
b.There has been a lack of consistency of applying GAAP.
c.There are questions about the continued existence of the entity.
d.The auditor relies on the report of another auditor.

9.If adequate disclosure is not made by the entity regarding substantial doubt
about its ability to continue as a going concern, the auditor should include in
his report specific reference to the substantial doubt as to ability of the
company to continue as a going concern and should express:
a.Unqualified opinion with explanatory paragraph
b.Either an “except for” qualified opinion or an adverse opinion.
c.A disclaimer of opinion.
d.A subject to qualified opinion or adverse opinion.

10.If the auditor believes that the entity will not be able to continue as a going
concern and the financial statements are prepared on a going concern basis,
the auditor’s report should include:
a.Unqualified opinion with explanatory paragraph.
b.Adverse opinion.
c.Qualified opinion.
d.Disclaimer of opinion.

11.An explanatory paragraph following an opinion paragraph that describes an


uncertainty follows:

As discussed in Note X to the financial statements, the company is a


defendant in a lawsuit alleging infringement of certain patent rights and
claiming damages. Discovery proceedings are in progress. The ultimate
outcome of the litigation cannot presently be determined. Accordingly, no
provision for any liability that may result upon adjudication has been made in
the accompanying financial statements.

What type of opinion should the auditor express in this circumstance?


a. Unqualified c. Qualified
b. Disclaimer d. Adverse

12.Identify the appropriate type of opinion to issue when the auditor is satisfied
that there is a remote likelihood of a loss resulting from the resolution of an
uncertainty.
a.Qualified opinion or disclaimer of opinion, depending on whether the
uncertainty is adequately disclosed.
b.Qualified opinion or disclaimer of opinion, depending upon the materiality of
the loss.
c.Unqualified opinion.
d.Unqualified opinion with a separate explanatory paragraph.
APPLIED AUDITING

13.If an amendment to other information in a document containing audited


financial statements is necessary and the entity refuses to make the
amendment, the auditor would consider issuing:
a.Qualified or adverse opinion
b.Unqualified opinion with explanatory paragraph
c.Qualified or disclaimer of opinion
d.Unqualified opinion.

14.Consistency in application of GAAP will be affected by a


a.Change in accounting estimates.
b.Change in accounting principles.
c.Change in classification or reclassification.
d.Change expected to have a material future effect.

15.Reference to the consistency of application of accounting principles in the


audit report is not applicable when:
a.The company changed its valuation method for property and equipment from
cost to appraisal.
b.The auditor was engaged to examine only the current year’s financial
statements and another auditor examined the prior year’s statements.
c.The financial statements examined are for the initial accounting period of the
company.
d.The auditor examined both the current and prior year’s financial statements
but only the current year’s financial statements are presented.

16.The auditor should evaluate a change in accounting principle to satisfy


himself that
a.The newly adopted principle is a generally accepted accounting principle
b.The method of accounting for the effect of the change is in conformity with
GAAP.
c.Management’s justification for the change is reasonable.
d.All of the above.

17.If financial statements are to meet the requirements of adequate disclosure,


a.All information pertaining to the company must be disclosed in the financial
statements or related notes, even though some of the disclosures may be
potentially detrimental to the company or its stockholders.
b.All information believed by the auditor to be essential to the fair presentation
of the financial statements must be disclosed, no matter how confidential
management believes the data to be.
c.Statement footnotes must clearly detail any deficiencies contained in the
financial statements themselves.
d.Preparation of the financial statements should be guided by the doctrine that
more information is always better than less.

18.When part of the examination is to be performed by another auditor, the


principal auditor may decide to assume responsibility for the other auditor’s
work and make no reference to such work when:
a.The portion examined by the other auditor is material to the financial
statements audited by the principal auditor.
APPLIED AUDITING

b.The other auditor is not a correspondent of the principal auditor.


c.It is impracticable for the principal auditor to review the other auditor’s work.
d.The other auditor was retained by the principal auditor and worked under his
supervision.

19.Assume that the principal auditor decided to refer in his report the
examination of another auditor, the principal auditor is required to disclose the
a.Portion of the financial statements examined by the other auditor.
b.Name of the other auditor.
c.Nature of his inquiry into the other auditor's professional standing and extent
of his review of the auditor's work.
d.Reasons why he is unwilling to assume responsibility for the other auditor's
work.

20.The following statements relate to modifications of the standard audit


report:
I.When an auditor is unable to reach a conclusion as to the propriety of
management’s representations, he should consider issuing either a qualifying
opinion or a disclaimer of opinion.
II.When restrictions that significantly limit the scope of the audit are imposed
by the client, the auditor generally should issue an adverse opinion.
III.Qualifying language may be added to the opinion paragraph of the auditor’s
report, but it is never added to the scope paragraph.
IV.A change in accounting principle from one generally accepted accounting
principle to another would not prevent the issuance of an unqualified audit
report provided the auditor approved the change in advance and the effects of
the change were set forth in a note to the financial statements.

State whether the foregoing statements are true or false.


a.All of the statements are true.
b.Only one of the statements is true.
c.Only two of the statements are true.
d.Three of the statements are true.

21.Due to unusual circumstances, the financial statements contain a departure


from GAAP otherwise the statements would be misleading. Under the
situation, the auditor should explain the unusual circumstances in a separate
paragraph and express an opinion that is
a.Unqualified.
b.Adverse.
c.Qualified or adverse, depending on materiality.
d.Qualified.

22.In determining the type of opinion to express, an independent auditor


evaluates the nature of the reporting qualifications and the materiality of their
effects. Materiality will be the principal factor considered in the choice
between
a.An adverse opinion and a disclaimer of opinion.
b.A “subject to” opinion and a piecemeal opinion.
c.An “except for” opinion and a “subject to” opinion.
APPLIED AUDITING

d.An “except for” opinion and an adverse opinion.

23.When an independent auditor is not satisfied with the extent of his audit, the
application or interpretation by the client of an accounting principle, or with
other matter about his work and for a reason personally known to him,
provided that, the exceptions of the auditor are not sufficiently material to
nullify an opinion on the financial statements taken as a whole, the auditor
should render a
a. Piecemeal opinion. c. Qualified opinion.
b. Adverse opinion. d. Unqualified opinion.

24.An auditor's "except for" report is a type of


a. Unqualified c. Qualified
b. Disclaimer d. Adverse

25.A CPA has not been able to confirm a large account receivable. However,
he was able to satisfy himself as to the propriety of the account by means of
alternative audit procedures. In this situation, the CPA may render
a. Piecemeal opinion. c. Unqualified opinion.
b. Qualified opinion. d. None of the above.

SUGGESTED ANSWERS:

1. D 11. A 21. A
2. A 12. C 22. D
3. A 13. B 23. C
4. B 14. B 24. C
5. A 15. C 25. C
6. C 16. D
7. C 17. B
8. D 18. D
9. B 19. A
10. B 20. C
APPLIED AUDITING

 To have an Information for Concept of Auditing Reports


https://youtu.be/bGzmqN3bda0

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 To have an idea about 4 Main types of Audit Reports


https://youtu.be/pQxdtjWe36o

Reference:
Compilation of lecture notes by
Dean Rene Boy R. Bacay , CPA, CrFA, CMC, MBA, FRIAcc

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