ACC 5400 Chapter 4: 4.

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4 Sep 2018

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Determining whether stms are in accordance w/ gaap = difficult. Departure permitted when auditor believes that adherence to these would result in misleading f/s = although rate. Complete explanation should be added paragraph: explain departure, opinion paragraph should be unmodified except for reference to the added para. Lack of indepdence override any other scope limitation. Auditors decision process for audit reports: auditors identify conditions as performing audit, if no condition is present= auditor issues a standard unmodified opinion audit report. Auditor must evaluate the potential effect on f/s. Must decide among immaterial, material and highly material. Decide the appropriate type of report for the condition, given materiality. Auditors may encounter situations involving more than one of the conditions requiring a departure from an unmodified opinion audit report ore revision to standard. Auditor is not independent and auditor knows company has not followed gaap. Scope limitation and there is substantial doubt about going concern.

Related Questions

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 entityâs 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. âWe have audited â¦â

b. âNothing came to our attentionâ¦â

c. âThe financial statements referred to above present fairlyâ¦â

d. âAn audit includes examining, on a test basis â¦â

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 ownersâ 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.

aquamarineeagle546

Following are two independent situations.

A. Grinner and Greeter, CPAs, were engaged to perform an audit ofthe financial statements of Happy, Inc. Happy's management wouldnot allow Grinner and Greeter to confirm any of the accountsreceivable. All other auditing procedures were performed asconsidered necessary by Grinner and Greeter and no issues wereencountered. However, Grinner and Greeter were unable to satisfythemselves with regard to the balance in accounts receivable.

B. Tick and Tie, CPAs, were performing their annual audit ofJohnson Manufacturing Company. Johnson is currently being sued for$2,000,000 related to an alleged defective product that they soldto a customer. Johnson's legal counsel has told Tick and Tie thatit is probable that Johnson will lose the suit and have to pay theentire $2,000,000. Johnson's management has included information inthe footnotes about the lawsuit. However, they have not recordedany loss or liability in the income statement or balancesheet.

Required:

For each of the two independent situations, state what type ofopinion should be issued on the company's financial statements.Briefly explain your rationale. Finally, state which paragraphs, ifany, of the standard report would be modified.

Note : I have the answer but I want to paraphraseit.

âTha answer is :

A. The company has imposed a scope limitationon Grinner and Greeter. Although it is possible to issue aqualified opinion for a less material scope limitation, disclaimersof opinion are more appropriately issued for client-imposed scopelimitations than for circumstance-imposed scope limitations. Forthe disclaimer of opinion, (1) the introductory paragraph would bemodified to state that auditors were engaged to audit thefinancial statements and delete the sentence referring to theauditors' responsibility for the financial statements, (2) thescope paragraph would be omitted, (3) an additional paragraph wouldbe added to describe the scope limitation, and, (4) the opinionparagraph would be modified to express a disclaimer ofopinion.

B. Because Johnson Manufacturing has not properlyrecorded a loss and a liability, the financial statements are notin conformity with generally accepted accounting principles.Therefore, depending on the overall materiality and pervasivenessof the misstatement, Tick and Tie should issue either a qualifiedor adverse opinion. In each case, a third paragraph would be addedto the report to explain the departure from GAAP and the opinionparagraph would be modified to express either a qualified opinionor an adverse opinion.

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Place the letter of the report type that best fits the languagepresented on the answer line. Each report type may be used morethan once or not at all, but each item has only one best answer. Ifyou think more than one answer may apply, choose the BESTanswer.

a. Explanatory language

b. Unqualified opinion with qualification forGAAP departure

c. Qualified opinion

d. Qualified opinion because of a scopelimitation

e. Qualified opinion because of an ICFRdeficiency

f. Qualified opinion because of a GAAPdeparture

g. Qualified opinion because of a change inaccounting standards

h. Qualified opinion because of lack ofindependence

i. Qualified opinion plus explanatorylanguage

j. Qualified opinion for dual dating

k. Qualified opinion to reflect need to rely onanother auditor

l. Disclaimer of opinion because of a scopelimitation

m. Disclaimer of opinion because of lack ofindependence

n. Adverse opinion

o. Combined report with unqualified opinions onfinancial statements and ICFR

_____1. In our opinion, the Company did notmaintain, in all material respects, effective internal control overfinancial reporting as of March 31, 2010, based on criteriaestablished in Internal ControlâIntegrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission(COSO)â¦

_____2. In addition, as discussed in Note 9 tothe consolidated financial statements, effective January 1, 2007,the Company adopted Accounting for Uncertainty in IncomeTaxes, FASB ASC 740-10.

_____3. We are not independent with respect toXYZ Company, and the accompanying balance sheet as of December 31,19X1, and the related statements of income, retained earnings, andcash flows for the year then ended. â¦

_____4. â¦because of the effects of the mattersdiscussed in the preceding paragraphs, the financial statementsreferred to above do not present fairly. â¦

_____5. We have also audited in accordance withthe standards of the Public Company Accounting Oversight Board(United States) the companyâs internal control over financialreporting as of December 31, 2010, based on criteria established inInternal Control-Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission and our reportdated August 6, 2011 expressed an unqualified opinion thereon.

_____6. â¦ except for the effects of suchadjustments, if any, as might have been determined to benecessaryâ¦

_____7. The accompanying financial statementshave been prepared assuming that ABC, Inc. will continue as a goingconcern. As more fully described in Note 1, the Company filed avoluntary petition for reorganization under Chapter 11 of theUnited States Bankruptcy Code on January 29, 2010, which raisessubstantial doubt about the Companyâs ability to continue as agoing concern. Managementâs plans in regard to this matter are alsodescribed in Note 1.

_____8. The Company did not make a count of itsphysical inventoryâ¦The Companyâs records do not permit theapplication of other auditing procedures. â¦the scope of our workwas not sufficient to enable us to express. â¦

_____9. In our opinion, except for the omissionof the information discussed in the preceding paragraphâ¦.

_____10. In our opinion, based on our auditsand the report of other auditors, the financial statements referredto above present fairly, in all material respectsâ¦

_____11. In our opinion, the financialstatements referred to above present fairly, in all materialrespects, the financial position of W Company as of December 31,2010 and 2009â¦. Also in our opinion, W Company maintained, in allmaterial respects, effective internal control over financialreporting as of December 31, 2010. â¦

_____12. We did not audit the financialstatements of B Company, a wholly-owned subsidiary, whichstatements reflect total assets and revenues constituting 20percent and 22 percent, respectively of the related consolidatedtotals. â¦ In our opinion, based on our audit and the report of theother auditors, the consolidated financial statements referred toabove present fairly. â¦

_____13. In our opinionâ¦the financialstatements present fairlyâ¦ Dated February 16, 2010, except for Note16, as to which the date is March 1, 2010.

_____14. Except as discussed in the followingparagraph, we conducted our audits in accordance with auditingstandardsâ¦. In our opinion, except for the effectsâ¦the financialstatements present fairly. â¦

_____15. As discussed in Note X to thefinancial statements, the 20X2 financial statements have beenrestated to correct a misstatement.

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ACC 5400 Chapter 4: 4.

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