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31 Cards in this Set
- Front
- Back
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Below are lists of accounting changes affecting consistency and comparability for a nonissuer. All items are material. Which list does NOT contain a change requiring recognition in the audit report? A. Correction of an error in an accounting principle; change in accounting estimate; reclassification.
C. Substantially different transactions; correction of a misstatement in preciously issued statements; a change in reporting entity not resulting from a transaction or event. D. Correction of a misstatement in previously issued statement; change in accounting estimate; a change in reporting entity not resulting from a transaction or event. |
B. A change in accounting estimate; a substantially different transaction; an accounting change having no material effect on the financial statements in the current year but having a substantial effect in subsequent years. |
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The objective of the auditor's evaluation of the consistency of financial statements is to determine whether A. Changes in classification have occurred. B. Substantially different transactions and event are not accounted for on an identical basis. C. The auditor should be consulted before material changes are made in the application of accounting principles. D. The comparability of financial statement between periods has been materially affected by a change in accounting principle. |
D. The comparability of financial statement between periods has been materially affected by a change in accounting principle. |
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Seripak Corporation made a material change in accounting principle with which the auditor concurs. The auditor should express A. An unmodified opinion with an emphases-of-matter paragraph.
C. An adverse opinon with an emphasis-of-matter paragraph. D. An "except for" opinion without an emphasis-of-matter paragraph. |
A. An unmodified opinion with an emphases-of-matter paragraph. |
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Which of the following is a change in the reporting entity that does not require an emphasis-of-matter paragraph about consistency to be added to the audit report?
A. Presenting consolidated statements in place of statements of individual companies. B. Changing specific subsidiaries included in the group of companies for which consolidated financial statements are presented. C. Purchase of a subsidiary. D. Changing the companies included in combined financial statements. |
C. Purchase of a subsidiary.
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The following additional paragraph was included in an auditor’s report to indicate a lack of consistency:
“As discussed in note T to the financial statements, the company changed its method of computing depreciation in Year 1." How should the auditor report on this matter if the auditor concurred with the change? A. Unmodified opinion; additional paragraph before Opinion paragraph. B. Unmodified opinion; additional paragraph after Opinion paragraph. C. Qualified opinion; additional paragraph before Opinion paragraph. D. Qualified opinion; additional paragraph after Opinion paragraph. |
B. Unmodified opinion; additional paragraph after Opinion paragraph.
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If management fails to justify a material change in accounting principle, the auditor should
A. Add a basis for modified opinion paragraph to the report and express a qualified or an adverse opinion. B. Disclaim an opinion because of uncertainty. C. Disclose the matter in a separate emphasis-of-matter paragraph but not modify the opinion paragraph. D. Neither modify the opinion nor disclose the matter because both principles are generally accepted. |
A. Add a basis for modified opinion paragraph to the report and express a qualified or an adverse opinion.
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When there has been a change in accounting principles, but the effect of the change on the comparability of the financial statement is not material, the auditor should
A. Refer to the change in an emphasis-of-matter paragraph. B. Explicitly concur that the change is preferred. C. Not refer to consistency in the auditor’s report. D. Refer to the change in the opinion paragraph. |
C. Not refer to consistency in the auditor’s report.
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A company has made material change in its method of inventory measurement from an unacceptable one to one in accordance with the applicable financial reporting framework. The auditor’s report on the financial statements of the year of the change should include
A. No reference to consistency. B. A reference to the entity’s disclosure of the correction. C. A note explaining the change. D. Justification for the change and the effect of the change on reported net income. |
B. A reference to the entity’s disclosure of the correction.
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The ABC Manufacturing Co. in Year 1 and Year 2 included certain factory administrative expenses in the general and administrative expense category. For the year ended December 31, Year 3, ABC has decided that these expenses should be allocated to units produced as part of factory overhead. The amount involved is material. The auditor should regard this change as a
A. Classification change that does not require special treatment or comment. B. Change in an accounting principle that requires management justification. C. Change in an accounting estimate that requires note explanation. D. Change from the absorption costing inventory method to the direct costing inventory method. |
B. Change in an accounting principle that requires management justification.
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Green Company uses the first-in, first-out method of costing for its international subsidiary’s inventory and the last-in, first-out method of costing for its domestic inventory. The different costing methods will cause Green’s auditor to issue a report with a(n)
A. Emphasis-of-matter paragraph as to consistency. B. Qualified opinion. C. Opinion modified as to consistency. D. Unmodified opinion. |
D. Unmodified opinion.
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A change in accounting principle made by a nonissuer has no material effect on the financial statement in the current year but is expected to have a material effect in later years. Accordingly, the change should be
A. Treated as a consistency modification of the opinion in the auditor’s report for the current year. B. Disclosed in the notes to the financial statements of the current year. C. Disclosed in the notes to the financial statements and referred to in the auditor’s report for the current year. D. Treated as a subsequent event. |
B. Disclosed in the notes to the financial statements of the current year.
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Which of the following situations concerning consistency should the auditor not recognize in the report?
A. A change in the specific subsidiaries included in the group of companies for which consolidated statements are presented. B. A change from an accounting principle that is not generally accepted to one that is generally accepted. C. A change in the percentage used to calculate the provision for warranty expense. D. The correction of a mistake in the application of an accounting principle required by the applicable financial reporting framework. |
C. A change in the percentage used to calculate the provision for warranty expense.
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An auditor is reporting on several periods, and a change in accounting principle occurred in the earliest period reported upon. If the new principle is applied in all periods presented, the auditor should
A. Refer to the change in the report even though there is not inconsistency subsequent to the change. B. Qualify the opinion for the first year reported on but express an unmodified opinion for the subsequent years. C. Not refer to the change. D. Refer to the change in a note to the audit report. |
C. Not refer to the change.
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If a material change in estimate is inseparable from a change in accounting principle, this event should be evaluated by the auditor as a change in
A. Estimate, and the auditor should report on consistency. B. Principle, and the auditor should report on consistency. C. Estimate, and the auditor should not recognize the change in the report. D. Principle, and the auditor should not recognize the change in the report. |
B. Principle, and the auditor should report on consistency.
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A nonissuer changed from the straight-line method to the declining-balance method of depreciation for all newly acquired assets. This change has no material effect on the current year’s financial statements but is reasonably certain to have a material effect in later years. If the change is disclosed in the notes to the financial statements, the auditor should issue a report with a(n)
A. Qualified opinion. B. Emphasis-of-matter paragraph. C. Unmodified opinion. D. Consistency modification. |
C. Unmodified opinion.
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Green, CPA, concludes that there is substantial doubt about JKL Co.’s ability to continue as a going concern. If JKL’s financial statement adequately disclose its financial difficulties, Green’s auditor’s report should
I. Include a paragraph following the opinion paragraph II. Specifically use the words “going concern” III. Specifically use the words “substantial doubt” A. I, II, and III. B. I and II. C. I and III. D. II an III. |
A. I, II, and III.
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Grant Company’s financial statements adequately disclose uncertainties that concern future events, the outcome of which are not susceptible to reasonable estimation. The auditor’s report should include a(n)
A. Unmodified opinion. B. “Subject to” qualified opinion. C. “Except for” qualified opinion. D. Adverse opinion. |
A. Unmodified opinion.
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In which of the following circumstances would an auditor most likely add an emphasis-of-matter paragraph to the auditor’s report while expressing an unmodified opinion?
A. The auditor is asked to report on the balance sheet but not on the other basic financial statements. B. There is substantial doubt about the entity’s ability to continue as a going concern. C. Management's estimates of the effects of future events are unreasonable. D. Certain material transactions cannot be tested because of management’s records retention policy. |
B. There is substantial doubt about the entity’s ability to continue as a going concern.
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A separate paragraph of an auditor’s report describes an uncertainty as follows:
“As discussed in Note X to the financial statements, the Company is a defendant in a lawsuit alleging infringement of certain patent rights and claiming damages. Discovery proceedings are in progress.” What type of opinion should the auditor express under these circumstances? A. Unmodified. B. “Subject to” qualified. C. “Except for” qualified. D. Disclaimer. |
A. Unmodified.
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If an auditor is satisfied that sufficient appropriate evidence supports management’s assertion about an uncertainty, the auditor should
A. Express an unmodified opinion. B. Express an unmodified opinion with a separate emphasis-of-matter paragraph. C. Disclaim an opinion. D. Express a qualified opinion or disclaim an opinion, depending upon the materiality of the loss. |
A. Express an unmodified opinion.
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Toby Hooper, CPA, had drafted an unmodified opinion on the audit of Chem Waste Disposal when she received a letter from the client’s independent counsel. The letter indicated that the state Department of Environmental Protection may prohibit Chem Waste from accepting any further waste for processing because of irregularities in its operating practices. Counsel intends to take all appropriate action to keep the firm in business, but the outcome is highly uncertain, and Hooper has substantial doubt about the company’s continued existence. Based on this information, Hooper should
A. Express an unmodified opinion with disclosure of the event in a separate emphasis-of-matter paragraph of her report. B. Issue an unmodified report because the event happened after year end. C. Express an adverse opinion on the financial statements and disclose the reasons. D. Add a note to the audit report explaining the event. |
A. Express an unmodified opinion with disclosure of the event in a separate emphasis-of-matter paragraph of her report.
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If a company is experiencing financial difficulty that raises substantial doubt about its ability to continue as a going concern, auditing standards require the auditor to
A. Withdraw from the engagement. B. Value the assets on a liquidation basis. C. Plan to conduct a complete audit rather than perform procedures on a test basis. D. Include in the report a paragraph describing the nature of the difficulties. |
D. Include in the report a paragraph describing the nature of the difficulties.
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The federal government alleges that your client has overcharged on certain contracts and is demanding a material refund. If the client is compelled to return this sum, the current ratio of 2:1 in the present financial statements would be reduced to 1.2:1, and a substantial reduction in retained earnings would occur. No decision has been reached at the end of field work, and a note adequately describing the event and negotiations has been written by the client. The auditor should most likely
A. Express an adverse opinion because of the material uncertainty. B. Issue an unmodified report because adequate disclosure of the uncertainty has been made in the notes. C. Express a qualified opinion because of the material uncertainty. D. Express a piecemeal opinion. |
B. Issue an unmodified report because adequate disclosure of the uncertainty has been made in the notes.
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An auditor concludes that there is substantial doubt about an entity’s ability to continue as a going concern for a reasonable period of time. The entity’s financial statements adequately disclose its financial difficulties. Under these circumstances, the auditor’s report is required to include an emphasis-of-matter paragraph that specifically uses the phrase(s)
I. “Except for the effects of such adjustments” II. “Possible discontinuance of the entity’s operations” A. I and II. B. I only. C. II only. D. Neither I nor II. |
D. Neither I nor II.
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A continuing auditor should update the report on prior financial statements by issuing a report modified for the
A. Resolution of an uncertainty related to and discovered in the current period. B. Removal on the current period of doubt about the entity’s ability to continue as a going concern. C. Determination in the current period that a substantial doubt exists about the entity’s ability to continue as a going concern for a reasonable time. D. Purchase and consolidation of a new company by the client. |
B. Removal on the current period of doubt about the entity’s ability to continue as a going concern.
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An auditor judges that additional communication in the report is needed to draw users’ attention to an important matter. If the matter is appropriately presented and disclosed in the statements, the matter is referred to
A. Only in the management’s responsibility for the financial statements paragraph. B. Only in an emphasis-of-matter paragraph. C. In the introductory paragraph and the opinion paragraph. D. In the opinion paragraph and the basis for modification paragraph. |
B. Only in an emphasis-of-matter paragraph.
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An auditor’s report expresses an unmodified opinion and includes an emphasis-of-matter paragraph. The auditor’s report is deficient if the emphasis-of-matter paragraph states that the entity
A. Is significantly affected by a major catastrophe. B. Has omitted a statement of cash flows. C. Has had an unusually important subsequent event. D. Has significant related party transactions. |
B. Has omitted a statement of cash flows.
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In which situation is the auditor most likely NOT to include an emphasis-of-matter paragraph in the auditor’s report?
A. An important audit procedure was performed. B. The client suffered a major catastrophe. C. Significant transactions with related parties were recorded. D. Unusually important subsequent events occurred. |
A. An important audit procedure was performed.
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An auditor includes an emphasis-of-matter paragraph in an otherwise unmodified report when the entity being reported on had significant transaction with related parties. The inclusion of this paragraph
A. Is considered a qualification of the opinion. B. Violates auditing standards if this information is already disclosed in notes to the financial statements. C. Necessitates a revision of the opinion paragraph to include the phrase “with the foregoing explanation.” D. Is appropriate and would not negate the unmodified opinion. |
D. Is appropriate and would not negate the unmodified opinion.
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An emphasis-of-matter paragraph is used in the auditor's report to draw users’ attention to
A. A material misstatement. B. A matter that is not presented or disclosed in the financial statements that is relevant to users’ understanding of the audit. C. A matter that management wishes to highlight. D. A matter appropriately presented or disclosed in the financial statements. |
D. A matter appropriately presented or disclosed in the financial statements.
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An other-matter paragraph is included in the auditor's report except when
A. The opinion on the prior-period statements has changed. B. Required supplementary information is presented. C. A predecessor auditor’s report is not reissued. D. The client has materially restated the prior year’s comparative financial statements. |
D. The client has materially restated the prior year’s comparative financial statements.
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