Chapter 3 - Audit Reports
? Multiple Choice Questions From CPA Examinations
3-23 a. (2) b. (3) c. (3) d. (3)
3-24 a. (2) b. (3) c. (1)
3-26 a. Items that need not be included in the auditor's report are:
1. That Excelsior is presenting comparative financial statements. (Both years'
statements will be referred to in the audit report.)
2. Specific description of the change in method of accounting for long-term
construction contracts need not be included in the report since it is discussed in
the footnotes. The auditor's report must state that there is a change in accounting
principles and refer to the footnote.
3. The fact that normal receivable confirmation procedures were not used should
not be disclosed since the auditor was able to satisfy him or herself through
alternate audit procedures.
4. The lawsuit need not be discussed in the report since it has been included in a
footnote. [Note: prior to the issuance of SAS 79, the auditor would have been
required to add an explanatory paragraph to the audit report that referred to the
b. The following deficiencies are in Roscoe's report:
1. The audit report is neither addressed nor dated and it does not contain a title.
The audit report date should be the last day of field work.
2. The balance sheet is as of a specific date, whereas the income statement and
the statement of retained earnings are for a period of time. The scope paragraph
should identify the period of time (usually one year). 3. There are comparative statements, but the audit report identifies and deals with
only the current year's financial statements. An opinion must also be included for
the prior period financial statements.
4. There is no separate introductory paragraph that states the financial statements
audited, dates, and the responsibilities of management and the auditor. 5. There is no separate scope paragraph that describes what an audit is. Two
required sentences are completely omitted: "An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation."
6. The audit was made in accordance with auditing standards generally accepted in
the United States of America rather than generally accepted accounting
7. The word material is excluded from the scope paragraph (free of material
8. An additional paragraph should be included which describes the dividend
restrictions and the refusal of the client to present a statement of cash flows. 9. The opinion paragraph states that accounting principles were consistent with
those used in the prior year. The opinion paragraph should make no reference to
10. The opinion paragraph excludes the required phrase, "in all material respects."
11. The opinion paragraph includes the words "generally accepted auditing
standards" rather than the phrase " accounting principles generally accepted in
the United States of America."
12. A separate paragraph should be included stating that generally accepted
accounting principles were not consistently applied. 13. The opinion should be qualified rather than being unqualified. Qualifications are
caused by the:
(a) failure to present a statement of cash flows.
(b) failure to disclose the dividend restrictions.
(a) (b) (c)
MATERIALITY TYPE OF
CONDITION LEVEL REPORT COMMENTS
1. Scope of the Highly material Disclaimer Because the client refuses to allow
audit has the auditor to expand the scope of
been his audit, a disclaimer of opinion is
restricted appropriate rather than a qualified as
to scope and opinion. 2. Scope of the Highly material Disclaimer The auditor cannot issue an
audit has unqualified opinion on the income
been statement or the statement of cash
restricted flows because a disclaimer of opinion
is necessary for the beginning
balance sheet. The auditor may
issue an unqualified opinion on the
ending balance sheet and a
disclaimer of opinion on the income
statement, statement of cash flows,
and the beginning balance sheet.
3. Scope of the Highly material Unqualified The auditor is able to satisfy him or
audit has herself that with the use of alternative
been procedures, a qualified opinion is not
restricted necessary. 4. Failure to Highly material or Adverse (if The materiality of twenty percent of
follow GAAP material. We need highly net earnings before taxes would be
additional material) sufficient for many auditors to require
information or an adverse opinion. That materiality
regarding the Qualified (if question is a matter of auditor
auditor's material) judgment.
5. Lack of Not applicable Disclaimer Lack of independence by audit
independence personnel on the engagement
mandates a disclaimer for lack of
independence. 6. None Not applicable Unqualified The company has made a decision
to follow a different financing method,
which is adequately disclosed. There
is no change of accounting principle.