Audit 456 - Fall 2008 - Chapter 3 Quiz 1.

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. not include any discriminatory language. 2. The purpose of the introductory paragraph in the standard unqualified report is: a. to identify the entity that was audited. b. to identify the financial statements that were audited and the dates and time periods covered by the report. c. to communicate the responsibilities of management in preparing the financial statements and to clarify the respective roles of management and the auditor. d. all of the above. 3. 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. 4. Which of the following is not an essential condition for issuing the standard unqualified audit opinion? a. All statements are included in the financial statements. b. The general standards have been followed in all respects. c. The financial statements are prepared in accordance with regulatory principles. d. Sufficient appropriate audit evidence has been accumulated. 5. 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. 6. 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 performed. c. the auditor is not independent. d. 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. 7. a. b. c. d. A disclaimer of opinion may be issued in which of the following instances? The auditor has doubts related to an entitys ability to continue as a going concern. There are highly material misstatements in the financial statements. The auditors scope has been restricted due to circumstances beyond the clients control. A disclaimer may be issued for circumstances discussed in a and c.

8. 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. d. Neither a nor b. 9. 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: a. materiality. b. pervasiveness. c. financial analysis. d. ratio analysis. 10. When the auditor evaluates the effect of a change in accounting principle, the materiality of the change should be evaluated based on: a. the prior years presented. b. the current year effect of the change. c. whatever basis the auditor considers appropriate. d. the effect on total assets. 11. There are five conditions that must be met before an auditor can issue a standard unqualified report for the audit of a private company. Please discuss each of these five conditions.
Answer: The five conditions that justify issuing a standard unqualified report are: All statementsbalance sheet, income statement, statement of retained earnings, and statement of cash flowsare included in the financial statements. The three general standards of GAAS have been followed in all respects on the engagement. Sufficient appropriate audit evidence has been accumulated and the auditor can conclude that the three fieldwork standards have been followed. The financial statements are presented in accordance with GAAP. There are no circumstances requiring the addition of an explanatory paragraph or modification of the wording of the report.

12. There are three conditions requiring a departure from an unqualified audit report. Discuss each of these three conditions and state the appropriate audit report for each condition.
Answer: The three conditions requiring a departure from an unqualified report are: a scope restriction imposed by the client or by circumstances beyond the auditors or clients control which prevents the auditor from accumulating sufficient evidence to reach a conclusion regarding whether financial statements are stated in accordance with GAAP. In this condition, the auditor would issue either a qualified scope and opinion report, or a disclaimer of opinion. the financial statements were not prepared in accordance with GAAP. In this condition, the auditor would issue a qualified opinion if the GAAP violation were moderately material, or an adverse opinion if the GAAP violation were highly material. the auditor is not independent. In this condition, the auditor must issue a disclaimer of opinion.