Mcconnel Auditing Chapter 3 Midterm

Front 1

What are the 3 conditions that require a departure from a standard unqualified opinion?

Back 1

1. Scope of the audit has been materially restricted (Scope limitation)
2. Financial statements have not been prepared in accordance with GAAP.
3. Auditor is not independent.

Front 2

Scope limitation

Back 2

When the auditor has not accumulated sufficient appropriate evidence to conclude whether the financial statements are stated in accordance with GAAP, a scope restriction exists.

Front 3

What 2 things usually cause a scope restriction?

Back 3

1. Client imposed.
2. CAused by circumstances beyond client or auditor's control (Such as being appointed at client's year end makes it impossible to physically observe inventory.

Front 4

Financial statements not presented with GAAP

Back 4

For example if a client insists on using replacement costs for fixed assets of values inventory at selling price rather than cost.

Front 5

Where are auditor independence guidelines outlined?

Back 5

Code of Professional Conduct Rule 101

Front 6

When is an unqualified report issued?

Back 6

1. All financial statements are included. (I.S., B.S., R.E., and C.F.)
2. All 3 general standards must be followed.
3. SUfficient evidence is accumulated to know standards of fieldwork have been followed.
4. Followed US GAAP
5. No conditions requiring explanatory paragraph exist.

Front 7

When is a qualified opinon report issued?

Back 7

This type of report follows when there is a failure to follow GAAP or when scope has been restricted.

Front 8

When can a qualified report be used?

Back 8

ONLY WHEN AUDITOR BELIEVES OVERALL STATEMENTS ARE STATED CORRECTLY.

Front 9

What is the least severe departure from unqualified opinion?

Back 9

Qualified opinion

Front 10

What two forms can a qualified opinion take?

Back 10

CAn either be qualification of both the scope and the opinion or of the opinion alone.

Front 11

When can qualification of opinion alone be used?

Back 11

ONLY IN DEPARTURE FROM GAAP

Front 12

What wording is present in a qualified opinion?

Back 12

When a qualified report is issued, the auditor must use the term, except for in the opinion paragraph. This implies that the auditor is satisfied that the overall financial statements are correctly stated "except for" a specific aspect of them.

UNACCEPTABLE TO USE EXCEPT FOR IN ANY OTHER OPINION.

Front 13

When is an adverse opinion issued?

Back 13

AN adverse opinion is only used when the auditor believes that the overall financial statements are so materially misstated or misleading that they do not present fairly the financial position or results of operations and cash flows in conformity with GAAP.

Front 14

When is a disclaimer of opinion issued?

Back 14

A disclaimer of opinion is issued only when the auditor has been unable to satisfy himself that the overall financial statements are fairly presented. The necessity to diclaim may arise from severe scope limitation OR a nonindependent relationshio under professional code of conduct.

Front 15

How is the diclaimer distinct from an adverse opinion.

Back 15

It can arise only from a LACK OF KNOWLEDGE whereas a adverse is used when the auditor KNOWS the statements is NOT fairly presented.

Front 16

If a misstatement is material which report should be used?

Back 16

Qualified.

Front 17

Define materiality

Back 17

A misstatement in financial statements can be considered material if knowledge of the misstatement will affect a decision of a reasonable user of the statement.

Front 18

What are immaterial amounts? IF there are immaterial misstatements what type of audit report should be issued.

Back 18

Amounts that would not be likely to affect the decision of a reasonable user. UNQUALIFIED

Front 19

When amounts are material but don't overshadow statements as a whole what audit opinon should be used?

Back 19

Qualified opinion using except for is appropriate.

Front 20

When amounts are so material that overall fairness of statements is in question, what audit opinion should be issued?

Back 20

Adverse

Front 21

What condition always calls for an adverse opinion?

Back 21

If there is determined to be a lack of independence, an disclaimer is always issued

Front 22

What audit opinion will be issued if a client fails to follow GAAP?

Back 22

IT depends the auditor can do unqualified if amount is immaterial.
Qualifed opinion if material
or adverse if highly material.

Front 23

When evaluating materiality what must an auditor do?

Back 23

They must combine all unadjusted misstatements and judge whether there may be individually immaterial misstatements that, when combined, significantly affect the statements.

Front 24

Measurability of misstatements.

Back 24

The dollar amount cannot be accurately measured sometimes. SUch as a client's willingness to disclose an existign lawsuit is difficult, if not impossible in terms of the dollar amount. The auditor must evaluate its effect on users of the faiure to make the disclosure.

Front 25

What are some transactions whihc may affect a users decision and the auditors opinion in a different way than most misstatements:

Back 25

1. Fraud
2. AN item that can affect materiality in future period even if current period is fine.
3. An item that has a "psychic affect"
4. Contractual obligations.

Front 26

Materiality decisions when scope limitations are present

Back 26

Audit report can be unqualified, qualified scope and opinion, or disclaimer depending on materiality of scope limitations. Auditor will consider same three factores for materiality decisions but will be considered differently. Size of POTENTIAL misstatements, rather than known misstatements will be important.

Front 27

How does materiality differ in scope restrictions?

Back 27

For client imposed restrictions, the auditor should be concerned about the possibility that management is trying to prevent discovery of misstated information. IN such cases, auditing standards encourage a disclaimer of opinion.
Two restrictions imposed relate to physical examination of inventory and confirmation of a/r. Reasons for these may be desire to save audit fees and to prevent possible conflicts in a/r when client and customer accounts differ.

Front 28

What conditions beyond control of client and auditor often cause a restriction in scope?

Back 28

When auditor is appointed after the client's balance sheet date. THe confirmation of A/R, physical exam of inventory, and other important procedures may be impossible under those circumstances.

Front 29

When auditor can't perform procedures desirable but can be satisfied with alternative procedures what can they do?

Back 29

THey can issue an unqualified report.

Front 30

If alternative procedures in scope limitation cannot be used what should the auditor do?

Back 30

They should issue a qualified scope and opinion or disclaimer of opinion is necessary.

Front 31

What does a scope resriction lead to in regards to the audit report?

Back 31

It leads to a qualifying paragraph preceding the opinion to describe the restriction. In the case of a disclaimer, the entire scope paragraph is excluded from the report.

Front 32

What does the auditor's opinion look like when a disclaimer is required?

Back 32

There are only three paragraphs.
1. First paragraph is modified to say we were engaged to audit
2. SEcond paragraph is the same as qualified paragraph
3. The scope paragraph is deleted and the final opinion is changed to a disclaimer.

Front 33

When the auditor knows financial statements may be misleading because they weren't prepared in accordance with GAAP, and the client is unwilling or unable to correct, what does the audit report look like?

Back 33

They must issue an adverse opinion depending on materiality.
The opinion must clearly state the nature of the departure from GAAP and also the amount of the misstatement if known.

Front 34

When amounts are so material or pervasive that an adverse opinion is required but scope is still unqualified what do they do?

Back 34

The opinion paragraph must read:
IN our opinion, because of the effects of the matters discussed in the preceding paragraph, the financial statements referred to above DO NOT PRESENT FAIRLY in conformity with GAAP the financial position as of December 31, or the results of its operations and its cash flows for the year then ended.

Front 35

When the client fails to include info necessary for fair presentation in the body of the statement or related footnotes, what must teh auditor do?

Back 35

Present the info in the audit report and issue a qualified or adverse opinion. It is common to include thi type of info in an added pargraph before the opinion.

Front 36

What does Rule 203 in the Code of Professional Conduct permit?

Back 36

A departure from GAAP when auditor believes adhering to gaap would result in misleading statement users,

Front 37

When an auditor decides that adherence to GAAP would result in misleading statements, what should there be?

Back 37

There should be a complete explanation in a third paragraph. The paragraph should fully explain the departure and why GAAP would result in a misleading statement.

Front 38

What happens to the structure of the audit report when the auditor decides adherence to GAAP would cause misleading statements?

Back 38

When this occurs, opinion paragraph should then be unqualified except for the reference to the third paragraph. This is an audit report with an explanatory paragraph.

Front 39

What type of audit report should be issued when there is a failure to include a statement of cash flows?

Back 39

Third paragraph stating the omission and an except for opinion qualification.

Front 40

What happens if it is discovered an auditor lacks independence?

Back 40

If a lack of independence is discovered, this overrides any other scope limitations and there should be no other information provided other than a disclaimer due to lack of independence.

Front 41

What must the auditor do to determine what auditing opinion is required?

Back 41

1. Determine if there are conditions requiring departure from a standard unqualified report.
2. Decide materiality for each condition
3. Decide the appropriate type of report for the condition, given the materiality level.
4. Write the audit report

Front 42

When accounting principles are not consistently applied what audit report should be issued?

Back 42

Unqualified with explanatory paragraph.

Front 43

If scope is restricted by client or other conditons and the condition is material but does not overshadow financial statements as a whole what type of report should be issued?

Back 43

Qualified scope, additional paragraph, and qualified opinion.

Front 44

If there is substantial doubt about going concern what type of report should be issued?

Back 44

Unqualified opinion with explanatory paragraph

Front 45

Financial statements are not prepared in accordance with GAAP if this is so material that overall fairness is in question what type of report should be issued?

Back 45

Adverse

Front 46

If there is a justified departure from GAAP or other accounting principle what type of opinion should be issued?

Back 46

Unqualified with explanatory paragraph

Front 47

Scope restricted by client or other conditions what type of report should be issued when it is so material that the overall fairness is in question?

Back 47

Disclaimer

Front 48

Emphasis of a matter what type of report should be issued?

Back 48

Unqualified report, explanatory paragraph

Front 49

When an auditor wants to draw attention to the use of another auditor what type of report should be issued?

Back 49

Unqualified report modified wording

Front 50

When the auditor is not independent what type of report should be issued?

Back 50

Disclaimer regardless of materiality

Front 51

What does the number of paragraphs in the report do?

Back 51

It signals the investor as to whether financial statements are correct. A 3 paragraph report usually menas no exceptions. However, these can also be issued when a disclaimer is involved.