Chapter 3

Multiple-Choice Questions

1. easy a

Auditing standards require that the audit report must be titled and that the title must: a. include the word independent. b. indicate if the auditor is a CPA. c. indicate if the auditor is a proprietorship, partnership, or incorporated. d. indicate the type of audit opinion issued. To emphasize the fact that the auditor is independent, a typical addressee of the audit report could be: Company Controller No No Yes Yes Shareholders Yes No Yes No Board of Directors Yes Yes No No

2. Medium a

a. b. c. d. 3. easy b

The purpose of the introductory paragraph in the standard unqualified report is: a. to identify that the type of opinion issued is unqualified. b. to identify the financial statements audited and the dates and time periods covered by the report. c. to indicate the CPA followed applicable audit standards. d. to indicate all the financial statements are in accordance with GAAP. The scope paragraph of the standard unqualified audit report states that the audit is designed to: a. discover all errors and/or irregularities. b. discover material errors and/or irregularities. c. conform to generally accepted accounting principles. d. obtain reasonable assurance whether the statements are free of material misstatement. The audit report date on a standard unqualified report indicates: a. the last day of the fiscal period. b. the date on which the financial statements were filed with the Securities and Exchange Commission. c. the last date on which users may institute a lawsuit against either client or auditor. d. the last day of the auditors responsibility for the review of significant events that occurred subsequent to the date of the financial statements. As a result of managements refusal to permit the auditor to physically examine inventory, the auditor has not accumulated sufficient appropriate evidence to conclude whether financial statements are stated in accordance with GAAP. The auditor must depart from the unqualified audit report because: a. the financial statements have not been prepared in accordance with GAAP. b. the scope of the audit has been restricted by circumstances beyond either the client s or auditors control. c. the auditor has lost independence. d. the scope of the audit has been restricted. An adverse opinion is issued when the auditor believes: a. some parts of the financial statements are materially misstated or misleading. b. the financial statements would be found to be materially misstated if an investigation were

4. easy d

5. easy d

6. easy d

7. easy d

c. d.

performed. the auditor is not independent. the overall financial statements are so materially misstated that they do not present fairly the financial position or results of operations and cash flows in conformity with GAAP.

8. easy c

If a misstatement is immaterial to the financial statements of the entity for the current period, but is expected to have a material effect in future periods, it is appropriate to issue a(n): a. adverse opinion. b. qualified opinion. c. unqualified opinion. d. disclaimer of opinion. Whenever an auditor issues an audit report for a public company, the auditor can choose to issue a report in which of the following forms? a. A combined report on financial statements and internal control over financial reporting. b. Separate reports on financial statements and internal control over financial reporting. c. Either a or b.

9. (Public) easy c

d.

Neither a nor b.

10. easy When determining whether an exception is highly material, the extent to which the exception affects different elements of the financial statements must be considered. This concept is called: b a. materiality. b. c. d. pervasiveness. financial analysis. ratio analysis.