Chapter 3 - Audit Reports

By Christina Morales,2014-05-15 16:09
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Chapter 3 - Audit Reports

    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.

    3-26, continued

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)



    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.


    judgment about


    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.

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