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The auditor is most likely to disclaim an opinionbecause of
A. Management’s failure to presentsupplementary information required by the FASB.
B. Inadequate disclosure of materialinformation.
C. A management-imposedlimitation.
D. A significant number of changes inaccounting principles.

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Reid Wolff
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2 Aug 2018

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Under which of the following circumstances might anauditor disclaim an opinion?
A. The financial statements contain adeparture from generally accepted accounting principles, the effectof which is material.
B. A group auditor decides to refer tothe report of a component auditor who audited a subsidiary.
C. There has been a material changebetween periods in the method of application of accountingprinciples.
D. There are significant uncertaintiesaffecting the financial statements for which the auditor is unableto obtain sufficient evidence to support management’sassertions.

Chapter 15

1. Consider the following statements:

I. For the last several years, both the FinancialAccounting Standards Board (FASB) and the

International Auditing and Assurance Standards Board (IAASB)have been considering possible

changes to the standard unqualified audit report.

II. The audit report is modified to five paragraphs as a resultof another audit firm performing part of

the financial statement audit (Refer to Shared Reporttopic).

a. I is true; II is true

b. I is true; II is false

c. I is false; II is true

d. I is false; II is false

2. Consider the following statements:

I. Inconsistent application of accounting principles is a GAAPviolation and would result in a

qualified or adverse audit opinion.

II. For a change in accounting principles thatmanagement does justify to the auditor, the

auditor will likely choose between a qualified or an adverseopinion.

a. I is true; II is true

b. I is true; II is false

c. I is false; II is true

d. I is false; II is false

3. Consider the following statements:

I. The failure of a client to include a Statement of Cash Flowswill result in the issuance of a

disclaimer of opinion by the auditor.

II. The auditor will issue an unqualified opinionon Internal Controls over Financial Reporting (ICFR)

if the auditor has identified only one material weakness inICFR.

a. I is true; II is true

b. I is true; II is false

c. I is false; II is true

d. I is false; II is false

4. In which of the following instances would an auditor mostlikely issue a standard unqualified opinion

WITH an explanatory paragraph?

a. Management disclosures are missing or inadequate.

b. There is substantial doubt about the entity’s ability tocontinue as a going-concern.

c. There is a significant limitation on the scope of theengagement.

d. There is an immaterial deviation from GAAP related tocapitalizing repairs.

5. Which one of the following is an example of the contents ofan 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 …”

6. A client company has a history of negative cash flow trendsand continuing losses. What would this

seem to involve?

a. GAAP problem

b. Going concern.

c. Lack of consistency.

d. Lack of independence.

7. 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 ofmarket values. Such a situation will

most likely result in which type of report?

a. Disclaimer.

b. Review.

c. Adverse.

d. Unqualified, with explanatory paragraph.

8. In which of the following instances would an auditor issue adisclaimer of opinion?

a. Lack of consistency.

b. GAAP problem.

c. There is a significant limitation on the scope of theengagement.

d. The principle auditor decides to make reference to anotherauditor who has issued an unqualified

audit report.

9. When might an auditor modify the introductory paragraph andreplace the scope paragraph with an

explanatory paragraph? The ANSWER is A.

a. When a pervasive 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.

Colorado Springs Company (CSC) is a wholesaler with fiscal year ended December 31 of previous year. Since it is publicly-traded, it undergoes external audit. The most recent audit was completed in February of this year. As part of the audit of the financial statements, the auditors tested the effectiveness of management’s assessment of internal control over financial reporting. The auditor found out that existing internal controls were inadequate. Specifically, CSC’s accounting system for sales, cash receipts, accounts receivables, and accounts payable had material weakness. The audit revealed that there were:

Poor accounting system of recording keeping

Late deposits of cash receipts

Excessive aged and high accounts receivable balances

Disregard for early payments for discounts on invoices

Late payments of accounts payable (sometimes due to lack of cash)

Lax appropriate segregation of duties

Relaxed rules on accounting principles’ application

Unqualified supervisor and management

Inadequate control on supervisor and management overrides

Lax oversight by external board of directors

1) For each finding above, indicate internal control principle that CSC violated.

2) For each finding above, provide an appropriate recommendation for CSC to correct the weakness.

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