Auditing and Assurance Services, 15e, Global Edition (Arens)

Chapter 3 Audit Reports

Learning Objective 3-1
1) An audit of historical financial statements most commonly includes the:
A) balance sheet, statement of retained earnings, and the statement of cash flows
!) income statement, the statement of cash flows, and the statement of net wor"ing ca#ital
$) statement of cash flows, balance sheet, and the statement of retained earnings
%) balance sheet, income statement, statement of cash flows, and the statement of changes in
stoc"holders& e'uity
Answer: %
() Auditing standards re'uire that the audit re#ort must be titled and that the title must:
A) include the word )inde#endent)
!) indicate if the auditor is a $*A
$) indicate if the auditor is a #ro#rietorshi#, #artnershi#, or cor#oration
%) indicate the ty#e of audit o#inion issued
Answer: A
3) +o em#hasi,e the fact that the auditor is inde#endent, a ty#ical addressee of the audit re#ort
could be:
A)
$om#any $ontroller -hareholders !oard of %irectors
.o /es /es
!)
$om#any $ontroller -hareholders !oard of %irectors
.o .o /es
$)
$om#any $ontroller -hareholders !oard of %irectors
/es /es .o
%)
$om#any $ontroller -hareholders !oard of %irectors
/es .o .o
Answer: A
0) +he auditor&s res#onsibility section of the standard un'ualified audit re#ort states that the audit
is designed to:
A) discover all errors and1or irregularities
!) discover material errors and1or irregularities
$) conform to generally acce#ted accounting #rinci#les
%) obtain reasonable assurance whether the statements are free of material misstatement
Answer: %
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5) +he audit re#ort date on a standard un'ualified re#ort indicates:
A) the last day of the fiscal #eriod
!) the date on which the financial statements were filed with the -ecurities and 46change
$ommission
$) the last date on which users may institute a lawsuit against either client or auditor
%) the last day of the auditor&s res#onsibility for the review of significant events that occurred
after the date of the financial statements
Answer: %
7) +he standard audit re#ort for non-#ublic entities refers to 8AA- and 8AA* in which
sections9
A)
8AA- 8AA*
Auditor&s res#onsibility Auditor&s res#onsibility
!)
8AA- 8AA*
Auditor&s res#onsibility :ntroductory #aragra#h
$)
8AA- 8AA*
;anagement&s res#onsibility
and O#inion #aragra#h
;anagement&s res#onsibility
and :ntroductory #aragra#h
%)
8AA- 8AA*
Auditor&s res#onsibility
;anagement&s res#onsibility
and O#inion #aragra#h
Answer: %
<) =hich of the following is not e6#licitly stated in the standard un'ualified audit re#ort9
A) +he financial statements are the res#onsibility of management
!) +he audit was conducted in accordance with generally acce#ted accounting #rinci#les
$) +he auditors believe that the audit evidence #rovides a reasonable basis for their o#inion
%) An audit includes assessing the accounting estimates used
Answer: !
>) +he standard un'ualified audit re#ort for a non-#ublic entity must:
A) have a re#ort title that includes the word )$*A)
!) be addressed to the com#any&s stoc"holders and creditors
$) be dated
%) include an e6#lanatory #aragra#h
Answer: $
?) +he management&s res#onsibility section of the standard audit re#ort for a non-#ublic
com#any states that the financial statements are:
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A) the res#onsibility of the auditor
!) the res#onsibility of management
$) the joint res#onsibility of management and the auditor
%) none of the above
Answer: !
13) +he introductory #aragra#h of the standard audit re#ort for a non-#ublic com#any #erforms
which functions9
: :t states the $*A has #erformed an audit
:: :t lists the financial statements being audited
::: :t states the financial statements are the res#onsibility of the auditor
A) : and ::
!) : and :::
$) :: and :::
%) :, :: and :::
Answer: A
11) =hich of the following statements are true for the audit re#ort of a non-#ublic entity9
: +he introductory #aragra#h states that management is res#onsible for the #re#aration and
content of the financial statements
:: +he sco#e #aragra#h states that the auditor evaluates the a##ro#riateness of accounting
#olicies used and the reasonableness of significant accounting estimates made by management
A) : only
!) :: only
$) : and ::
%) .either : nor ::
Answer: !
1() +he auditor&s res#onsibility section of the standard audit re#ort states that the auditor is:
A) res#onsible for the financial statements and the o#inion on them
!) res#onsible for the financial statements
$) res#onsible for the o#inion on the financial statements
%) jointly res#onsible for the financial statements with management
Answer: $
13) :f the balance sheet of a #rivate com#any is dated %ecember 31, (311, the audit re#ort is
dated @ebruary >, (31(, and both are released on @ebruary 15, (31(, this indicates that the
auditor has searched for subse'uent events that occurred u# to:
A) %ecember 31, (311
!) Aanuary 1, (31(
$) @ebruary >, (31(
%) @ebruary 15, (31(
Answer: $
10) +he a##ro#riate audit re#ort date for a standard non'ualified audit re#ort for a non-#ublic
entity should be the:
A) date the financial statements are given to the !oard of %irectors
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!) date of the financial statements
$) date the auditor com#leted the auditing #rocedures in the field
%) 73 days after the date of the financial statements as re'uired by the -4$
Answer: $
15) ;ost auditors believe that financial statements are )#resented fairly) when the statements are
in accordance with 8AA*, and that it is also necessary to:
A) determine that they are not in violation of @A-! statements
!) e6amine the substance of transactions and balances for #ossible misinformation
$) review the statements using the accounting #rinci#les #romulgated by the -4$
%) assure investors that net income re#orted this year will be e6ceeded in the future
Answer: !
17) An audit re#ort #re#ared by 8arrett and !rown, $*As, is #rovided below +he audit for the
year ended %ecember 31, (31( was com#leted on ;arch 1, (313, and the re#ort was issued to
Aavlin $or#oration, a #rivate com#any, on ;arch 13, (313 List any deficiencies in this re#ort
%o not rewrite the re#ort
=e have e6amined the accom#anying financial statements of %alton $or#oration as of
%ecember 31, (31( +hese financial statements are the res#onsibility of the com#any&s
management
Management's Responsibility for the Financial Statements:
;anagement is res#onsible for the #re#aration and fair #resentation of the financial statements in
accordance with generally acce#ted auditing standardsB this includes the design, im#lementation,
and maintenance of internal control relevant to the #re#aration and fair #resentation of financial
statements that are free from all misstatement, whether due to fraud or error
Auditor's Responsibility
Our res#onsibility is to give an o#inion on these financial statements based on our audit =e
conducted our audits in accordance with auditing standards generally acce#ted throughout the
world+hose standards re'uire that we #lan and #erform the audit to obtain absolute assurance
about whether the financial statements are free of misstatement
An audit involves #erforming #rocedures to obtain audit evidence about the amounts and
disclosures in the financial statements +he #rocedures selected de#end on management&s
judgment, including the assessment of the ris"s of material misstatement of the income
statement, whether due to fraud or error :n ma"ing those ris" assessments, the auditor considers
internal control relevant to the auditor&s #re#aration and fair #resentation of the financial
statements in order to design audit #rocedures that are a##ro#riate in the circumstances, but not
for the #ur#ose of e6#ressing an o#inion on the effectiveness of the entity&s internal control An
audit also includes evaluating the a##ro#riateness of accounting #olicies and the accuracy of
accounting estimates made by management, as well as evaluating the overall #resentation of the
financial statements
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=e believe that the audit evidence we have obtained is sufficient and a##ro#riate to #rovide a
basis for our audit o#inion
Opinion
:n our o#inion, the financial statements referred to above #resent accurately the financial #osition
of Aavlin $or#oration as of %ecember 31, (31(, in conformity with accounting #rinci#les
generally acce#ted in the Cnited -tates of America
8arrett and !rown, $*As
;arch, (313
Answer: +he audit re#ort contains the following deficiencies:
D +he re#ort title is missing +he title must include the word independent.
D +he audit re#ort address is missing+he re#ort should be addressed to shareholders and the
board of directors
D +he introductory #aragra#h should refer to an )audit,) not an )e6amination)
D +he introductory #aragra#h should list the financial statements that were audited
D +he introductory #aragra#h refers to the wrong com#any
D +he introductory #aragra#h should not state that the financial statements are the
res#onsibility of management +his belongs in the ne6t section- management&s res#onsibility
D +he management&s res#onsibility section should state that the financial statements are in
accordance with )accounting #rinci#les generally acce#ted in the Cnites -tates of America) not
in accordance with generally acce#ted auditing standards)
D +he auditor&s res#onsibility section should state that our res#onsibility is to )e6#ress) an
o#inion, not )give) an o#inion
D +he auditor&s res#onsibility section should state the audit was conducted in accordance with
)auditing standards generally acce#ted in the Cnited -tates of America), not )throughout the
world)
D +he auditor&s res#onsibility section should state that the audit was #lanned and #erformed to
obtain )reasonable) assurance, not )absolute )assurance
D +he auditor&s res#onsibility section should state that the financial statements are free of
)material misstatements,) not sim#ly )misstatement)
D +he sco#e #aragra#h of the auditor&s res#onsibility section should state that the #rocedures
selected de#end on the )auditor&s) judgment, not )management&s) judgment
D +he sco#e #aragra#h of the auditor&s res#onsibility section should state ris" of material
misstatement in the )financial statements,) not the )income statement)
D +he sco#e #aragra#h of the auditor&s res#onsibility section should state the auditor considers
internal control relevant to management's #re#aration , not the entity's #re#aration
D +he sco#e #aragra#h of the auditor&s res#onsibility section is missing the sentence
)Accordingly, we e6#ress no such o#inion) +his should be #laced right after the second
sentence
D +he sco#e #aragra#h of the auditor&s res#onsibility section should state ) reasonableness" of
significant accounting estimates,) not )accurate.)
D +he sco#e #aragra#h should contain the following #hrase: )An audit also includes assessing
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the accounting #rinci#les used and significant estimates made by management, as well as
evaluating the overall financial statement #resentation)
D +he auditor&s o#inion section should state that the financial statements #resent )fairly, in all
material respects," not #resent accurately
D +he auditor&s o#inion section should include )and the results of their o#erations and cash
flows for the year then ended)
D +he audit re#ort should be dated ;arch 1, (313
1<) %escribe the standard un'ualified re#ort to be issued for an audit of a #rivate com#any
!egin by s#ecifying the eight #arts of the re#ort, and then discuss the contents of each #art
Answer: +he #arts of the standard un'ualified re#ort are as follows:
D Report title +he title must include the word )inde#endent) 46am#les of a##ro#riate titles are
)inde#endent auditor&s re#ort,) or )re#ort of inde#endent accountant)
D Report address. +he re#ort is usually addressed to the com#any&s stoc"holders or board of
directors :t should not be addressed to com#any management
D ntroductory paragraph +his #aragra#h states that an audit was #erformed to distinguish the
re#ort from a com#ilation or review re#ort :t also lists the financial statements that were audited,
including the notes to the financial statements as well as the balance sheet dates and the
accounting #eriods for the income statement and statement of cash flows +he wording of the
financial statements in the re#ort should be identical to those used by management on the
financial statements
D Management's Responsibility section +his section states that the statements are the
res#onsibility of management +his res#onsibility includes selecting the a##ro#riate accounting
#rinci#les and maintaining internal control over financial re#orting sufficient for #re#aration of
financial statements that are free of material misstatements due to fraud or error
D Auditor's Responsibility section +his section contains three #aragra#hs:
+he first #aragra#h states that E1) the audit was conducted in accordance with auditing standards
generally acce#ted in the Cnited -tates of America, E() the audit is designed to obtain reasonable
assurance about whether the statements are free of material misstatement
+he second #aragra#h is called the sco#e #aragra#h and describes the sco#e of the audit and the
evidence accumulated +his #aragra#h indicates that the #rocedures de#end on the auditor&s
judgment and includes an assessment of the ris" of material misstatements in the financial
statements :t also indicates that the auditor considers internal control relevant to the #re#aration
and fair #resentation of the financial statements in designing the audit #rocedures #erformed, but
this assessment of internal control is not for the #ur#ose and is not sufficient to e6#ress an
o#inion on the effectiveness of the entity&s internal control +he last sentence of the #aragra#h
indicates that the audit includes evaluating the accounting #olicies selected, the reasonableness
of accounting estimates, and the overall financial statement #resentation
+he third #aragra#h indicates the auditor believes that sufficient a##ro#riate evidence has been
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obtained to su##ort the auditor&s o#inion
D Opinion paragraph +his #aragra#h states the auditor&s conclusions based on the results of
the audit :t states that in the auditor&s o#inion the financial statements #resent fairly, in all
material res#ects, the financial #osition of the com#any as of a certain date, and the results of
their o#erations and cash flows for the the yearEs) then ended, in accordance with accounting
#rinci#les generally acce#ted in the Cnited -tates of America
D !ame of "#A firm +y#ically, the name of the $*A firm, and not the name of an individual
auditor, is used
D Audit report date +he audit re#ort is normally dated as of the last day of fieldwor"
1>) 4*;, :nc, is a #rivate manufacturing com#any with a calendar year-end +heir financial
statements include a balance sheet, a statement of income, statement of cash flows, and statement
of stoc"holders& e'uity @or the most recent audit, Farrington and *erry, LL*, audited the (311
and (31( financial statements +he auditors com#leted all significant fieldwor" on ;arch 5,
(313 and issued the audit re#ort on ;arch 17, (313
Re$uired:
$onsider all the facts given and write the standard un'ualified auditor&s re#ort, including all eight
sections of the re#ort
Answer: Independent Auditor's Report
+o the !oard of %irectors and -hareholders of 4*;, :nc
=e have audited the accom#anying balance sheets of 4*;, :nc, as of %ecember 31, (31( and
(311, and the related statements of income, changes in stoc"holders& e'uity, and cash flows for
the years then ended, and the related notes to the financial statements
Management's Responsibility for the Financial Statements
;anagement is res#onsible for the #re#aration and fair #resentation of the financial statements in
accordance with accounting #rinci#les generally acce#ted in the Cnited -tates of AmericaB this
includes the design, im#lementation, and maintenance of internal control relevant to the
#re#aration and fair #resentation of financial statements that are free from material misstatement,
whether due to fraud or error
Auditor's Responsibility
Our res#onsibility is to e6#ress an o#inion on these financial statements based on our audits =e
conducted our audits in accordance with auditing standards generally acce#ted in the Cnited
-tates of America +hose standards re'uire that we #lan and #erform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement
An audit involves #erforming #rocedures to obtain audit evidence about the amounts and
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disclosures in the financial statements +he #rocedures selected de#end on the auditor&s
judgment, including the assessment of the ris"s of material misstatement of the financial
statements, whether due to fraud or error :n ma"ing those ris" assessments, the auditor considers
internal control relevant to the entity&s #re#aration and fair #resentation of the financial
statements in order to design audit #rocedures that are a##ro#riate in the circumstances, but not
for the #ur#ose of e6#ressing an o#inion on the effectiveness of the entity&s internal control
Accordingly, we e6#ress no such o#inion An audit also includes evaluating the a##ro#riateness
of accounting #olicies used and the reasonableness of significant accounting estimates made by
management, as well as evaluating the overall #resentation of the financial statements
=e believe that the audit evidence we have obtained is sufficient and a##ro#riate to #rovide a
basis for our audit o#inion
Opinion
:n our o#inion, the financial statements referred to above #resent fairly, in all material res#ects,
the financial #osition of 4*;, :nc, as of %ecember 31, (31( and (311, and the results of their
o#erations and cash flows for the years then ended, in accordance with accounting #rinci#les
generally acce#ted in the Cnited -tates of America
Farrington and *erry, LL*
;arch 5, (313
Learning Objective 3-(
1) :n which of the following situations would the auditor most li"ely issue an un'ualified re#ort9
A) +he client valued ending inventory by using the re#lacement cost method
!) +he client valued ending inventory by using the .e6t-:n-@irst-Out E.:@O) method
$) +he client valued ending inventory at selling #rice rather than historical cost
%) +he client valued ending inventory by using the @irst-:n-@irst-Out E@:@O) method, but
showed the re#lacement cost of inventory in the .otes to the @inancial -tatements
Answer: %
() +he standard un'ualified audit re#ort:
A) is sometimes called a clean o#inion
!) can be issued only with an e6#lanatory #aragra#h
$) can be issued if only a balance sheet and income statement are included in the financial
statements
%) is sometimes called a disclaimer re#ort
Answer: A
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Learning Objective 3-3
1) =henever an auditor issues an audit re#ort for a #ublic com#any, the auditor can choose to
issue a re#ort in which of the following forms9
: A combined re#ort on financial statements and internal control over financial re#orting
:: -e#arate re#orts on financial statements and internal control over financial re#orting
A) : only
!) :: only
$) 4ither : or ::
%) .either : nor ::
Answer: $
() +he standard un'ualified audit re#ort for #ublic entities includes the following three
#aragra#hs:
A) introductory, sco#e and management&s res#onsibility
!) materiality, sco#e and re#ort
$) introductory, sco#e and o#inion
%) sco#e, fieldwor" and conclusion
Answer: $
3) Auditing standards for #ublic com#anies are established by the:
A) -4$
!) @A-!
$) *$AO!
%) :G-
Answer: $
Learning Objective 3-0
1) 46am#les of un'ualified o#inions which contain modified wording Ewithout adding an
e6#lanatory #aragra#h) include:
A) the use of other auditors
!) material uncertainties
$) substantial doubt about the audited com#any Eor the entity) continuing as a going concern
%) lac" of consistent a##lication of 8AA*
Answer: A
() A $*A may wish to em#hasi,e s#ecific matters regarding the financial statements even though
an un'ualified o#inion will be issued .ormally, such e6#lanatory information is:
A) included in the sco#e #aragra#h
!) included in the o#inion #aragra#h
$) included in a se#arate #aragra#h in the re#ort
%) included in the introductory #aragra#h
Answer: $
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3) All of the following are causes for the addition of an e6#lanatory #aragra#h under both A:$*A
and *$AO! standards except for:
A) em#hasis of a matter
!) re#orts involving other auditors
$) lac" of consistent a##lication of generally acce#ted accounting #rinci#les
%) auditor agrees with a de#arture from #romulgated accounting #rinci#les
Answer: !
0) +he term )e6#lanatory #aragra#h) was re#laced in the A:$*A auditing standards with:
A) going concern #aragra#h
!) em#hasis-of-matter #aragra#h
$) de#arture from #rinci#les #aragra#h
%) consistency #aragra#h
Answer: !
5) =hich of the following are changes that affect the com#arability of financial statements but
not the consistency and therefore, do not have to be included in the auditor&s re#ort9
A) 4rror corrections not involving #rinci#les
!) $hanges in accounting estimates
$) Hariations in the format and #resentation of financial information
%) All of the above
Answer: %
7) =hich of the following is least li"ely to cause uncertainty about the ability of an entity to
continue as a going concern9
A) +he entity is suing a com#etitor for a minor #atent infringement
!) +he entity has lost a major customer
$) +he entity has significant recurring o#erating losses
%) +he entity has wor"ing ca#ital deficiencies
Answer: A
<) =hen there is uncertainty about a com#any&s ability to continue as a going concern, the
auditor&s concern is the #ossibility that the client may not be able to continue its o#erations or
meet its obligations for a )reasonable #eriod of time) @or this #ur#ose, a reasonable #eriod of
time is considered not to e6ceed:
A) si6 months from the date of the financial statements
!) one year from the date of the financial statements
$) si6 months from the date of the audit re#ort
%) one year from the date of the audit re#ort
Answer: !
>) =hen the auditor concludes that there is substantial doubt about the entity&s ability to continue
as a going concern, the a##ro#riate audit re#ort could be:
: an un'ualified o#inion with an e6#lanatory #aragra#h
:: a disclaimer of o#inion
A) : only
!) :: only
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$) : or ::
%) .either : nor ::
Answer: $
?) =hen a com#any&s financial statements contain a de#arture from 8AA* with which the
auditor concurs, the de#arture should be e6#lained in:
A) the sco#e #aragra#h
!) an e6#lanatory #aragra#h that a##ears before the o#inion #aragra#h
$) the o#inion #aragra#h
%) an e6#lanatory #aragra#h after the o#inion #aragra#h
Answer: %
13) =illiam 8regory, $*A, is the #rinci#al auditor for a multi-national cor#oration Another $*A
has e6amined and re#orted on the financial statements of a significant subsidiary of the
cor#oration 8regory is satisfied with the inde#endence and #rofessional re#utation of the other
auditor, as well as the 'uality of the other auditor&s e6amination =ith res#ect to his re#ort on the
consolidated financial statements, ta"en as a whole, 8regory:
A) must not refer to the e6amination of the other auditor
!) must refer to the e6amination of the other auditor
$) may refer to the e6amination of the other auditor
%) must refer to the e6amination of the other auditors along with the #ercentage off consolidated
assets and revenue that they audited
Answer: $
11) A com#any has changed its method of inventory valuation from an unacce#table one to one
in conformity with generally acce#ted accounting #rinci#les +he auditor&s re#ort on the financial
statements of the year of the change should include:
A) no reference to consistency
!) a reference to a #rior #eriod adjustment in the o#inion #aragra#h
$) an e6#lanatory #aragra#h that justifies the change and e6#lains the im#act of the change on
re#orted net income
%) an e6#lanatory #aragra#h e6#laining the change
Answer: %
1() =hich of the following modifications of the auditor&s re#ort does not include an e6#lanatory
#aragra#h9
A) A 'ualified re#ort is due to a 8AA* de#arture
!) +he re#ort includes an em#hasis of a matter
$) +here is a very material sco#e limitation
%) A #rinci#al auditor acce#ts the wor" of an other auditor
Answer: %
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13) .o reference is made in the auditor&s re#ort to other auditors who #erform a #ortion of the
audit when:
: +he other auditor audited an immaterial #ortion of the audit
:: +he other auditor is well "nown or closely su#ervised by the #rinci#le auditor
::: +he #rinci#le auditor has thoroughly reviewed the wor" of the other auditor
A) : and ::
!) : and :::
$) :: and :::
%) :, :: and :::
Answer: %
10) =hen an auditor is trying to determine how changes can affect consistency and and1or
com#arability, he should "ee# in mind that:
A) changes that affect com#arability but not consistency re'uire an e6#lanatory #aragra#h
!) items that materially affect the com#arability of financial statements re'uires a disclaimer of
o#inion
$) changes that affect consistency re'uire an e6#lanatory #aragra#h if they are material
%) changes that involve either com#arability or consistency only need to be mentioned in the
footnotes
Answer: $
15) All of the following would re'uire an em#hasis of matter #aragra#h except for:
A) the e6istence of material related #arty transactions
!) the lac" of auditor inde#endence
$) im#ortant events occurring subse'uent to the balance sheet date
%) material uncertainties disclosed in the footnotes
Answer: !
17) Cnder A:$*A auditing standards, the #rimary auditor issuing the o#inion on the financial
statements is called the:
A) com#onent auditor
!) #rinci#al auditor
$) grou# engagement #artner
%) majority auditor
Answer: $
1<) =hich of the following is false concerning the #rinci#al $*A firm&s alternatives when issuing
a re#ort when another $*A firm #erforms #art of the audit9
A) :ssue a joint re#ort signed by both $*A firms
!) ;a"e no reference to the other $*A firm in the audit re#ort, and issue the standard
un'ualified o#inion
$) ;a"e reference to the other auditor in the re#ort by using modified wording Ea shared o#inion
or re#ort)
%) A 'ualified o#inion or disclaimer, de#ending on materiality, is re'uired if the #rinci#al auditor
is not willing to assume any res#onsibility for the wor" of the other auditor
Answer: A
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1>) =hich of the following re'uires recognition in the auditor&s o#inion as to consistency9
A) +he correction of an error in the #rior year&s financial statements resulting from a
mathematical mista"e in ca#itali,ing interest
!) A change in the estimate of #rovisions for warranty costs
$) +he change from the cost method to the e'uity method of accounting for investments in
common stoc"
%) A change in de#reciation method which has no effect on current year&s financial statements
but is certain to affect future years
Answer: $
1?) :ndicate which changes would re'uire an e6#lanatory #aragra#h in the audit re#ort
A)
$orrection of an error by changing from
an accounting #rinci#le that is not
generally acce#table to one that is
generally acce#table $hange from L:@O to @:@O
/es /es
!)
$orrection of an error by changing from
an accounting #rinci#le that is not
generally acce#table to one that is
generally acce#table $hange from L:@O to @:@O
.o .o
$)
$orrection of an error by changing from
an accounting #rinci#le that is not
generally acce#table to one that is
generally acce#table $hange from L:@O to @:@O
/es .o
%)
$orrection of an error by changing from
an accounting #rinci#le that is not
generally acce#table to one that is
generally acce#table $hange from L:@O to @:@O
.o /es
Answer: A
13
$o#yright 2 (310 *earson 4ducation
(3) :ndicate which changes would re'uire an e6#lanatory #aragra#h in the audit re#ort
A)
$hange in the estimated life
of an asset
Hariation in the format of the
financial statements
/es /es
!)
$hange in the estimated life
of an asset
Hariation in the format of the
financial statements
.o .o
$)
$hange in the estimated life
of an asset
Hariation in the format of the
financial statements
/es .o
%)
$hange in the estimated life
of an asset
Hariation in the format of the
financial statements
.o /es
Answer: !
(1) :ndicate which changes would re'uire an e6#lanatory #aragra#h in the audit re#ort
A)
+he $*A concludes there is
substantial doubt about the
entity&s ability to continue as
a going concern $hange from @:@O to L:@O
/es /es
!)
+he $*A concludes there is
substantial doubt about the
entity&s ability to continue as
a going concern $hange from @:@O to L:@O
.o .o
$)
+he $*A concludes there is
substantial doubt about the
entity&s ability to continue as
a going concern $hange from @:@O to L:@O
/es .o
%)
10
$o#yright 2 (310 *earson 4ducation
+he $*A concludes there is
substantial doubt about the
entity&s ability to continue as
a going concern $hange from @:@O to L:@O
.o /es
Answer: A
(() :ndicate which changes would re'uire an e6#lanatory #aragra#h in the audit re#ort
A)
A de#arture from 8AA*
which, due to unusual
circumstances, does not
re'uire a 'ualified or adverse
o#inion
+he $*A ma"es reference to
the wor" of another auditor to
indicate shared res#onsibility
in an un'ualified o#inion
/es /es
!)
A de#arture from 8AA*
which, due to unusual
circumstances, does not
re'uire a 'ualified or adverse
o#inion
+he $*A ma"es reference to
the wor" of another auditor to
indicate shared res#onsibility
in an un'ualified o#inion
.o .o
$)
A de#arture from 8AA*
which, due to unusual
circumstances, does not
re'uire a 'ualified or adverse
o#inion
+he $*A ma"es reference to
the wor" of another auditor to
indicate shared res#onsibility
in an un'ualified o#inion
/es .o
%)
A de#arture from 8AA*
which, due to unusual
circumstances, does not
re'uire a 'ualified or adverse
o#inion
+he $*A ma"es reference to
the wor" of another auditor to
indicate shared res#onsibility
in an un'ualified o#inion
.o /es
Answer: $
15
$o#yright 2 (310 *earson 4ducation
Learning Objective 3-5
1) As a result of management&s refusal to #ermit the auditor to #hysically e6amine inventory, the
auditor must de#art from the un'ualified audit re#ort because:
A) the financial statements have not been #re#ared in accordance with 8AA*
!) the sco#e of the audit has been restricted by circumstances beyond either the client&s or
auditor&s control
$) the financial statements have not been audited in accordance with 8AA-
%) the sco#e of the audit has been restricted
Answer: %
() An adverse o#inion is issued when the auditor believes:
A) some #arts of the financial statements are materially misstated or misleading
!) the financial statements would be found to be materially misstated if an investigation were
#erformed
$) the auditor is not inde#endent
%) the overall financial statements are so materially misstated that they do not #resent fairly the
financial #osition or results of o#erations and cash flows in conformity with 8AA*
Answer: %
3) An auditor can e6#ress a 'ualified o#inion due to a:
A)
%e#arture from
8AA* Lac" of $onsistency
Lac" of -ufficient
4vidence
/es .o .o
!)
%e#arture from
8AA* Lac" of $onsistency
Lac" of -ufficient
4vidence
.o /es .o
$)
%e#arture from
8AA* Lac" of $onsistency
Lac" of -ufficient
4vidence
/es .o /es
%)
%e#arture from
8AA* Lac" of $onsistency
Lac" of -ufficient
4vidence
/es /es /es
Answer: $
17
$o#yright 2 (310 *earson 4ducation
0) An auditor determines the financial statements include at least a material de#arture from
8AA* =hich ty#e of o#inion may be issued9
A)
%isclaimer Iualified Adverse
/es .o .o
!)
%isclaimer Iualified Adverse
.o /es .o
$)
%isclaimer Iualified Adverse
/es .o /es
%)
%isclaimer Iualified Adverse
.o /es /es
Answer: %
5) A 'ualified o#inion can be issued for which of the following9
: =hen a limitation on the sco#e of the audit has occurred
:: =hen the auditor lac"s inde#endence
::: =hen generally acce#ted accounting #rinci#les have not been used
A) : and ::
!) : and :::
$) :: and :::
%) :, :: and :::
Answer: !
7) :n which situation would the auditor be choosing between )e6ce#t for) 'ualified o#inion and
an adverse o#inion9
A) +he auditor lac"s inde#endence
!) A client-im#osed sco#e limitation
$) A circumstance im#osed sco#e limitation
%) Lac" of full disclosure within the footnotes
Answer: %
<) =hen the auditor determines that the financial statements are fairly stated, but there is a
noninde#endent relationshi# between the auditor and the client, the auditor should issue:
A) an adverse o#inion
!) a disclaimer of o#inion
$) either a 'ualified o#inion or an adverse o#inion
%) either a 'ualified o#inion or an un'ualified o#inion with modified wording
Answer: !
1<
$o#yright 2 (310 *earson 4ducation
>) :f the auditor lac"s inde#endence, a disclaimer of o#inion must be issued:
A) if the client re'uests it
!) only if it is highly material
$) only if it is material but not #ervasive
%) in all cases
Answer: %
?) :f the #hrase )e6ce#t for) is #resent in the o#inion #aragra#h of the audit re#ort, the auditor
has issued aEn):
A) adverse o#inion
!) disclaimer of o#inion
$) un'ualified o#inion
%) 'ualified o#inion
Answer: %
13) A client has changed their method of valuing inventory from @:@O to L:@O and the change
has a material effect on the financial statements :f the auditor does not concur with the
a##ro#riateness of the change, the auditor should issue aEn):
A) disclaimer
!) adverse o#inion
$) un'ualified o#inion
%) 'ualified o#inion
Answer: %
11) :tems that materially affect the com#arability of financial statements generally re'uire
disclosure in the footnotes :f the client refuses to #ro#erly disclose the item, the auditor will
most li"ely issue:
A) a disclaimer
!) an un'ualified o#inion
$) a 'ualified o#inion
%) an adverse o#inion
Answer: $
1() =hich of the following scenarios does not result in a 'ualified o#inion9
A) A sco#e limitation #revents the auditor from com#leting an im#ortant audit #rocedure
!) $ircumstances e6ist that #revent the auditor from conducting a com#lete audit
$) +he auditor lac"s inde#endence with res#ect to the audited entity
%) An accounting #rinci#le at variance with 8AA* is used
Answer: $
1>
$o#yright 2 (310 *earson 4ducation
13) =henever the client im#oses restrictions on the sco#e of the audit, the auditor should be
concerned that management may be trying to #revent discovery of misstatements :n such cases,
the auditor will li"ely issue a:
A) disclaimer of o#inion in all cases
!) 'ualification of both sco#e and o#inion in all cases
$) disclaimer of o#inion whenever materiality is in 'uestion
%) 'ualification of both sco#e and o#inion whenever materiality is in 'uestion
Answer: $
10) :n which of the following circumstances would an auditor most li"ely e6#ress an adverse
o#inion9
A) +he $4O refuses to let the auditor have access to the board of director meeting minutes
!) +he financial statements are not in conformity with the @A-! statement on loss
contingencies
$) :nformation comes to the auditor&s attention that raises substantial doubt about the ability for
the client to continue as a going concern
%) +ests of controls show that the internal control structure is so #oor that the auditor has to
assess control ris" at the ma6imum
Answer: !
15) =hich of the following statements is true9
: +he auditor is re'uired to issue a disclaimer of o#inion in the event of a material uncertainty
:: +he auditor is re'uired to issue a disclaimer of o#inion in the event of a going concern
#roblem
A) : only
!) :: only
$) : and ::
%) .either : nor ::
Answer: %
17) +he most common case in which conditions beyond the client&s and auditor&s control cause a
sco#e restriction in an engagement is when the:
A) auditor is not a##ointed until after the client&s year-end
!) client won&t allow the auditor to confirm receivables for fear of offending its customers
$) auditor doesn&t have enough staff to satisfactorily audit all of the client&s foreign subsidiaries
%) client is going through $ha#ter 11 ban"ru#tcy
Answer: A
1<) =hen the client fails to ma"e ade'uate disclosure in the body of the statements or in the
related footnotes, it is the res#onsibility of the auditor to:
A) inform the reader that disclosure is not ade'uate, and to issue an adverse o#inion
!) inform the reader that disclosure is not ade'uate, and to issue a 'ualified o#inion
$) #resent the information in the audit re#ort and issue an un'ualified or 'ualified o#inion
%) #resent the information in the audit re#ort and to issue a 'ualified or an adverse o#inion
Answer: %
1?
$o#yright 2 (310 *earson 4ducation
Learning Objective 3-7
1) A misstatement in the financial statements can be considered material if "nowledge of the
misstatement will affect a decision of:
A) the *$AO!
!) a reasonable user of the financial statements
$) an accountant
%) the -4$
Answer: !
() ;isstatements must be com#ared with some measurement base before a decision can be made
about materiality A commonly acce#ted measurement base includes:
A) net income
!) total assets
$) wor"ing ca#ital
%) all of the above
Answer: %
3) =hen com#aring misstatements with a measurement base, the auditor must consider the
#ervasiveness of the misstatement Of the following e6am#les, the most #ervasive misstatement
is aEn):
A) understatement of inventory
!) understatement of retained earnings caused by a miscalculation of dividends #ayable
$) misclassification of notes #ayable as a long-term liability when it should be current
%) misclassification of salary e6#ense as a selling e6#ense
Answer: A
0) +he dollar amount of some misstatements cannot be accurately measured @or e6am#le, if the
client were unwilling to disclose an e6isting lawsuit, the auditor must estimate the li"ely effect
on:
A) net income
!) users of the financial statements
$) the auditor&s e6#osure to lawsuits
%) management&s future decisions
Answer: !
5) :f most or all users& decisions that are based on the financial statements are li"ely to be
significantly affected, the materiality level is:
A) unrestricted
!) material
$) #ervasive
%) ris"y
Answer: $
7) =hen a client fails to follow 8AA*, the audit re#ort can be un'ualified, 'ualified, or adverse
de#ending on the materiality =hat factors affect materiality that an auditor should consider9
A) +he dollar amount in com#arison to a base
(3
$o#yright 2 (310 *earson 4ducation
!) :f the misstatement can be measured
$) +he nature of the item
%) All the above are factors an auditor should consider regarding materiality
Answer: %
<) =hich of the following is a correct statement regarding materiality9
A) +here are well-defined guidelines that enable auditors to determine if something is material
!) ;isstatements must be com#ared with some benchmar" before a decision can be made about
the materiality level of the failure of a com#any to follow 8AA*
$) *ervasiveness is not considered when com#aring #otential misstatements with a base or
benchmar"
%) +o evaluate overall materiality, the auditor does not combine all unadjusted misstatements
Answer: !
(1
$o#yright 2 (310 *earson 4ducation
Learning Objective 3-<
1) +he e6#lanatory #aragra#h for a 'ualified o#inion would:
A) #recede the sco#e #aragra#h
!) follow the sco#e #aragra#h
$) follow the o#inion #aragra#h
%) either #recede or follow the o#inion #aragra#h de#ending on the materiality
Answer: !
+erms: 46#lanatory #aragra#h for 'ualified o#inion
%iff: 4asy
Objective: LO 3-<
AA$-!: Geflective thin"ing s"ills
() An auditor who issues a 'ualified o#inion because sufficient a##ro#riate evidence was not
obtained should describe the limitations in an e6#lanatory #aragra#h +he auditor should also
modify the:
A)
-co#e #aragra#h O#inion #aragra#h
.otes to the financial
statements
/es .o /es
!)
-co#e #aragra#h O#inion #aragra#h
.otes to the financial
statements
.o /es /es
$)
-co#e #aragra#h O#inion #aragra#h
.otes to the financial
statements
.o /es .o
%)
-co#e #aragra#h O#inion #aragra#h
.otes to the financial
statements
/es /es .o
Answer: %
((
$o#yright 2 (310 *earson 4ducation
3) =hen an auditor issues a 'ualified re#ort due to a sco#e limitation an e6#lanatory #aragra#h is
normally added =hich, if any, of the following #aragra#hs are also modified9
A)
:ntroductory -co#e O#inion
/es /es /es
!)
:ntroductory -co#e O#inion
/es /es .o
$)
:ntroductory -co#e O#inion
.o /es .o
%)
:ntroductory -co#e O#inion
.o /es /es
Answer: %
0) =hen a 'ualified or adverse o#inion is issued, the 'ualifying #aragra#h is inserted:
A) between the introductory and sco#e #aragra#hs
!) between the sco#e and o#inion #aragra#hs
$) after the o#inion #aragra#h, as a fourth #aragra#h
%) immediately after the address, as the first #aragra#h
Answer: !
5) +he inde#endent auditor must issue a 'ualified o#inion when which of the financialEs) are
missing9
: !alance -heet
:: :ncome -tatement
::: -tatement of $ash @lows
A) : only
!) :: only
$) ::: only
%) :, ::, and :::
Answer: $
7) :f the financial statements include an income statement and a balance sheet but e6clude the
statement of cash flows, the auditors:
A) can issue an un'ualified re#ort
!) should issue a 'ualified o#inion due to the de#arture from 8AA*
$) should issue a 'ualified o#inion because the missing statement of cash flows constitutes a
sco#e limitation
%) should include the statement of cash flows, modify the re#ort and issue an un'ualified
o#inion
Answer: !
(3
$o#yright 2 (310 *earson 4ducation
<) =hich of the following is incorrect concerning sco#e limitations9
A) :f client im#osed, the auditor should be concerned about the client trying to #revent discovery
of a material misstatement
!) An un'ualified o#inion can result if auditors can #erform alternative #rocedures and are
satisfied that the information is fairly stated
$) +he most common circumstance im#osed sco#e restriction is due to the client changing their
auditors
%) +he most common circumstance im#osed sco#e limitation is when the auditor is a##ointed
after the balance sheet date
Answer: $
>) =hen dealing with materiality and sco#e limitation conditions:
A) a disclaimer of o#inion must be issued
!) it is easier to evaluate the materiality of #otential misstatements resulting from a sco#e
limitation than for failure to follow 8AA*
$) sco#e limitations im#osed by the client are always considered material
%) a un'ualified o#inion may still be issued de#ending on the materiality of the sco#e limitation
Answer: %
?) =hen a #ervasive sco#e limitation e6ists:
A) a disclaimer of o#inion rather than a 'ualified o#inion is generally re'uired
!) the auditor&s res#onsibility #aragra#h is modified to indicate that the auditor was not able to
obtain sufficient a##ro#riate evidence to e6#ress an audit o#inion
$) sections of the auditor&s res#onsibility #aragra#h are eliminated to avoid stating anything that
might lead readers to believe that other #arts of the financial statements might be fairly stated
%) all of the above
Answer: %
13) =hen there is a sco#e restriction, what ty#e of audit re#ort can be issued9
A) Cn'ualified o#inion
!) Iualification of sco#e and o#inion
$) %isclaimer of o#inion
%) Any of the above
Answer: %
11) -ubse'uent to the close of -#acely -#roc"ets fiscal year ending October 31, (31(, a major
debtor has declared ban"ru#tcy due to a series of events +he receivable is significantly material
in relation to the financial statements, and recovery is doubtful +he debtor had confirmed the
full amount due to -#acely -#roc"et at the balance sheet date !ecause the account was
confirmed at the balance sheet date, -#acely refuses to disclose any information in relation to
this subse'uent event +he $*A believes that all other accounts were stated fairly at the balance
sheet date :n addition, -#acely changed their method of inventory valuation from @:@O to L:@O
+his change was disclosed in .ote J to the financial statements Accordingly, what ty#e of
o#inion should be e6#ressed9
A) Cn'ualified with an e6#lanatory #aragra#h
!) Iualified due to a 8AA* de#arture
$) Iualified due to a sco#e limitation
(0
$o#yright 2 (310 *earson 4ducation
%) A combination of ! and $
Answer: !
1() @or the re#ort containing a disclaimer for lac" of inde#endence, the disclaimer is in the:
A) second or sco#e #aragra#h
!) third or o#inion #aragra#h
$) first and only #aragra#h
%) fourth or e6#lanatory #aragra#h
Answer: $
13) =hen an adverse o#inion is issued, a sco#e #aragra#h would be:
A) 'ualified
!) unchanged
$) deleted
%) e6#anded to identify the additional #rocedures which the auditor #erformed
Answer: !
10) After the balance sheet date but #rior to issuance of the auditor&s re#ort the auditor learns that
the client&s facility in a foreign country has been e6#ro#riated ;anagement refuses to disclose
this information in a financial statement footnote or #resent #ro-forma data as to the effect of the
event +he auditor should:
A) add a footnote to the financial statements
!) disclaim an o#inion due to the client im#osed sco#e limitation
$) #rovide the information in the re#ort and modify the o#inion
%) issue an un'ualified o#inion but #rovide the information in the auditor re#ort
Answer: $
(5
$o#yright 2 (310 *earson 4ducation
15) +he following is a #ortion of an adverse audit re#ort issued for a #ublic com#any E.ote: A
se#arate re#ort was issued on the effectiveness of internal control over financial re#orting)

Independent Auditor's Report
+o the shareholders of =allace $or#oration
=e have audited the accom#anying balance sheet of =allace $or#oration as of %ecember 31,
(31(, and the related statements of income, retained earnings, and cash flows for the year then
ended +hese financial statements are the res#onsibility of the com#any&s management Our
res#onsibility is to e6#ress an o#inion on these financial statements based on our audit
=e conducted our audit in accordance with the standards of the *ublic $om#any Accounting
Oversight !oard ECnited -tates) +hose standards re'uire that we #lan and #erform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement An audit includes e6amining, on a test basis, evidence su##orting the amounts and
disclosures in the financial statements An audit also includes assessing the accounting #rinci#les
used and significant estimates made by management, as well as evaluating the overall financial
statement #resentation =e believe that our audit #rovides a reasonable basis for our o#inion
+he com#any has e6cluded from #ro#erty and debt in the accom#anying balance sheet certain
lease obligations that, in our o#inion, should be ca#itali,ed in order to conform with generally
acce#ted accounting #rinci#les :f these lease obligations were ca#itali,ed, #ro#erty would be
increased by K10,533,333, long-term debt by K13,(33,333, and retained earnings by K1,333,333
as of %ecember 31, (31(, and net income and earnings #er share would be increased by
K1,333,333 and K((5, res#ectively, for the year then ended

Re$uired:
$om#lete the above adverse audit re#ort by #re#aring the o#inion #aragra#h %o not date or sign
the re#ort
Answer: :n our o#inion, because of the significance of the matter discussed in the #receding
#aragra#h, the financial statements referred to above do not #resent fairly the financial #osition
of =allace $or#oration as of %ecember 31, (31(, or the results of its o#erations and its cash
flows for the year then ended
(7
$o#yright 2 (310 *earson 4ducation
17) +he following is the introductory #aragra#h, and the !asis for Iualified O#inion #aragra#h
for @ast +imes $or#oration, a non-#ublic com#any
Independent Auditor's Report
+o the shareholders of @ast +imes $or#oration
=e have audited the accom#anying balance sheet of @ast +imes $or#oration as of -e#tember 33,
(31(, and the related statements of income, retained earnings, and cash flows for the year then
ended, and the related notes to the financial statements
%asis for &ualified Opinion
=e were unable to obtain audited financial statements su##orting the com#any&s investment in a
foreign affiliate stated at K1,303,333, or its e'uity in earnings of that affiliate of K531,333, which
is included in net income, as described in .ote 10 to the financial statements !ecause of the
nature of the com#any&s records, we were unable to satisfy ourselves as to the carrying value of
the investment or the e'uity in its earnings by means of other auditing #rocedures
Re$uired:
*re#are the o#inion #aragra#h for the above audit re#ort %o not date or sign the re#ort
Answer: :n our o#inion, e6ce#t for the effects of the matter described in the !asis for Iualified
O#inion #aragra#h, the financial statements referred to above #resent fairly, in all material
res#ects, the financial #osition of @ast +imes $or#oration as of -e#tember 33, (31(, and the
results of its o#erations and its cash flows for the year then ended in conformity with accounting
#rinci#les generally acce#ted in the Cnited -tates of America
1<) /our $*A firm has com#leted the fieldwor" for the (31( audit of -har# $or#oration, a
#rivate com#any with an October year-end /ou were #re#aring to draft a standard, un'ualified
audit re#ort when you discovered that the audit manager on the -har# engagement owns 13
shares of -har#&s common stoc" *re#are the a##ro#riate re#ort
Answer: =e are not inde#endent with res#ect to -har# $or#oration, and the accom#anying
balance sheet as of October 31, (31(, and the related statements of income, retained earnings,
and cash flows for the year then ended were not audited by us Accordingly, we do not e6#ress an
o#inion on them
1>) Assume you are the #artner in charge of the (31( audit of !ec"er $or#oration, a #rivate
com#any +he audit re#ort has not yet been #re#ared :n each inde#endent situation following E1-
>), indicate the a##ro#riate action Ea-g) to be ta"en +he #ossible actions are as follows:
a :ssue a standard un'ualified re#ort
b Iualify both the sco#e and o#inion #aragra#hs
c Iualify the o#inion #aragra#h
d :ssue an un'ualified o#inion with an e6#lanatory #aragra#h
e :ssue an un'ualified o#inion with modified wording Eno e6#lanatory #aragra#h)
f :ssue an adverse o#inion
(<
$o#yright 2 (310 *earson 4ducation
g %isclaim an o#inion
+he situations are as follows:
LLLLLLLL 1 !ec"er $or#oration carries its #ro#erty, #lant, and e'ui#ment accounts at current
mar"et values $urrent mar"et values e6ceed historical cost by a highly material amount, and the
effects are #ervasive throughout the financial statements
LLLLLLLL ( ;anagement of !ec"er $or#oration refuses to allow you to observe, or ma"e, any
counts of inventory +he recorded boo" value of inventory is highly material
LLLLLLLL 3 /ou were unable to confirm accounts receivable with !ec"er&s customers Fowever,
because of detailed sales and cash recei#ts records, you were able to #erform reliable alternative
audit #rocedures
LLLLLLLL 0 One wee" before the end of fieldwor", you discover that the audit manager on the
!ec"er engagement owns a material amount of !ec"er&s common stoc"
LLLLLLLL 5 /ou relied u#on another $*A firm to #erform #art of the audit Although you were
the #rinci#al auditor, the other firm audited a material #ortion of the financial statements /ou
wish to refer to Ebut not name) the other firm in your re#ort
LLLLLLLL 7 /ou have substantial doubt about !ec"er&s ability to continue as a going concern
LLLLLLLL < !ec"er $or#oration changed its method of com#uting de#reciation in (31( /ou
concur with the change and the change is #ro#erly disclosed in the financial statement footnotes
LLLLLLLL > +en days after the balance sheet date, one of !ec"er&s buildings was destroyed by a
fire !ec"er refuses to disclose this information in a footnote to the financial statements, but you
believe disclosure is re'uired to conform with 8AA* +he amount of the uninsured loss was
material, but not highly material
Answer:
1 f
( g
3 a
0 g
5 e
7 d or g
< d
> c
(>
$o#yright 2 (310 *earson 4ducation
1?) -mith and Aones, $*As, audited the consolidated financial statements of $oncord :nc and all
but one of its subsidiaries for the year ended -e#tember 33, (31( and are e6#ressing an
un'ualified o#inion on the financials #resented as a whole
-mith, the engagement #artner, instructed ;ary, an assistant on the engagement, to draft the
auditor&s re#ort on .ovember 0, (31(, the date of fieldwor" com#letion :n drafting the re#ort
;ary considered the following:
D :n #re#aring its financial statements, $oncord changed its method of accounting for research
and develo#ment costs and #ro#erly e6#ensed these amounts ;anagement described the change
in #rinci#le in .ote 13 to the consolidated financial statements
D !all M !rown, $*As, audited the financial statements of !iotherm, :nc, a consolidated
subsidiary of $oncord for the year ended -e#tember 33, (31( +he subsidiary&s financial
statements reflect total assets of ((N and total revenues of (3N of the consolidated totals !all M
!rown e6#ressed an un'ualified o#inion and furnished to -mith M Aones a co#y of their auditor
re#ort -mith M Aones have decided not to assume res#onsibility for the wor" of !all M !rown
insofar as it relates to the e6#ression of an o#inion on the consolidated financial statements ta"en
as a whole because of the materiality of !iotherm&s financial statements to the consolidated
whole !all M !rown&s re#ort will not be #resented together with that of -mith M Aones
D $oncord is the subject of a grand jury investigation into #ossible violations of federal
antitrust laws and #ossible related crimes Gelated civil class actions are #ending $oncord&s
management has ade'uately disclosed in .ote 1( to their consolidated financial statements
!ecause of the early stage of the investigation, the ultimate outcome of these matters cannot be
determined at this time +herefore, no #rovision for any liability that may result has been
recorded
D $oncord e6#erienced a net loss in (31( and is currently in default under substantially all of
its debt agreements ;anagement&s #lans in regard to these matters are ade'uately disclosed in
.ote 10 to $oncord&s consolidated financial statements +he financials do not include any
adjustments that might result from the outcome of this uncertainty +hese matters rase substantial
doubt about $oncord&s ability to continue as a going concern
!all reviewed ;ary&s draft and indicated in his review notes that there were many deficiencies in
;ary&s %raft +he audit re#ort that ;ary drafted follows
Independent Auditor's Report
=e have audited the consolidated financial statements of $oncord, :nc, and subsidiaries as of
-e#tember 33, (31(, and the related consolidated statements of income, changes in stoc"holders
e'uity and cash flows for the year then ended +hese financial statements are the res#onsibility of
the $om#any&s management Our res#onsibility is to e6#ress an o#inion on these financial
statements based on our audits =e did not audit the financial statements of !iotherm, :nc, a
wholly-owned subsidiary, which statements reflect total assets and revenues constituting ((N
and (3N res#ectively at -e#tember 33, (31( of the consolidated totals +hose statements were
audited by !all M !rown, $*As, whose re#orts have been furnished to us, and our o#inion,
insofar as it relates to the amounts included for !iotherm, :nc is based solely on their re#ort
=e conducted our audit in accordance with generally acce#ted auditing standards +hose
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$o#yright 2 (310 *earson 4ducation
standards re'uire that we #lan and #erform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement An audit includes e6amining,
on a test basis, evidence su##orting the amounts and disclosures in the financial statements An
audit also includes assessing the accounting #rinci#les used, as well as assessing control ris" =e
believe our audits #rovide a reasonable basis for our o#inion
:n our o#inion, based on our audit and the re#ort of the other auditors, the consolidated financial
statements referred to above #resent fairly, in all material res#ects, the financial #osition of
$oncord :nc, as of -e#tember 33, (31( in conformity with generally acce#ted accounting
#rinci#les, e6ce#t for the uncertainty, which is discussed in .ote 1( to the consolidated
financials
+he accom#anying consolidated financial statements have been #re#ared assuming that the
$om#any will continue in e6istence for a reasonable #eriod of time As discussed in .ote 10 to
the consolidated financial statements, the $om#any suffered a net loss and is currently in default
under substantially all of its debt agreements ;anagement&s #lans in regard to these matters are
also described in .ote 10 +he consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty
-mith M Aones, $*As
.ovember 0, (31(
Ge'uired:
+he following items #resent some of the deficiencies in the drafted audit re#ort noted by -mith
@or each deficiency, indicate whether:
- -mith&s review note is correct
; ;ary&s draft is correct
! !oth -mith&s review note and ;ary&s draft are incorrect
Smith's Review Notes
1 An e6#lanatory #aragra#h is re'uired between the sco#e and o#inion #aragra#hs is re'uired
for the change in accounting #rinci#les referring the reader to .ote 13
( +he names of the other auditors do not need to be e6#licitly stated in the introductory
#aragra#h Only that )other auditors) #erformed the audit and #rovided their re#ort
3 +he o#inion #aragra#h should e6tend the auditor&s o#inion beyond financial #osition to include
the results of $oncord&s o#erations and flows

0 +he reference to the uncertainty in the o#inion #aragra#h is incom#lete :t should describe the
nature of the uncertainty as #ertaining to the grand jury investigation into #ossible violations of
federal antitrust laws

5 +he e6#lanatory #aragra#h following the o#inion #aragra#h does not include the terms
)substantial doubt) and )going concern) +hese terms are re'uired to be used in this #aragra#h
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$o#yright 2 (310 *earson 4ducation
7 +he e6#lanatory #aragra#h following the o#inion #aragra#h includes an ina##ro#riate
statement that )the consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty) +his statement is misleading and should be omitted
Answer:
1 !
( -
3 -
0 !
5 -
7 ;
(3) :n auditing the long-term investments account, Arens, $*A, is unable to obtain audited
financial statements for an investee located in a foreign country Levine concludes sufficient
a##ro#riate audit evidence regarding this investment cannot be obtained
@or each of the following situations below, identify the a##ro#riate o#inion ty#e and re#ort
modification by selecting a choice from the a##ro#riate tables below

-ituation
O#inion
+y#e
:ntro -co#e O#inion 46#1
1 Assume the #otential effect on the
financial statements is immaterial
( Assume the #otential effect on the
financial statements is moderate
3 Assume the #otential effect on the
financial statements is high

O#inion +y#e -tandard *aragra#h $hoice 46#lanatory *aragra#h
C Cn'ualified O Omit 3 .one re'uired
I Iualified . .o change O :nsert before o#inion
A Adverse ; ;odify - :nsert after o#inion
% %isclaimer
Answer:
-ituation
O#inion
+y#e
:ntro -co#e O#inion 46#1
1 Assume the #otential effect on the
financial statements is immaterial C . . . 3
( Assume the #otential effect on the
financial statements is moderate I . ; ; O
3 Assume the #otential effect on the
financial statements is high % O ; ; O

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(1) Audit situations 1 through 13 #resent various inde#endent factual situations an auditor might
encounter in conducting an audit List A re#resents the ty#es of o#inions the auditor ordinarily
would issue, and List ! re#resents the re#ort modifications Eif any) that would be necessary @or
each situation, select one res#onse from List A and one from List ! -elect, as the best answer
for each item, the action the auditor normally would ta"e :tems from either list may be selected
once, more than once, or not at all
Assume the following:
D +he auditor is inde#endent
D +he auditor #reviously e6#ressed an un'ualified o#inion on the #rior-year financial
statements unless otherwise noted
D Only single-year Enot com#arative) statements are #resented for the current year Eunless
otherwise stated)
D +he conditions for an un'ualified o#inion e6ist unless contradicted in the factual scenario
D +he conditions stated in the factual scenario are material
D .o re#ort modifications are to be made e6ce#t in res#onse to the factual scenario
@actual -cenario
1 +he financial statements #resent fairly, in all material res#ects, the financial #osition, results of
o#erations, and cash flows in conformity with 8AA*
( :n auditing the Long-+erm :nvestments account, an auditor is unable to obtain audited @1- for
an investee located in a foreign country +he auditor concludes that sufficient com#etent
evidential matter regarding this investment cannot be obtained but it is not #ervasive to the
financials as a whole
3 %ue to recurring o#erating losses and wor"ing ca#ital deficiencies the auditor has substantial
doubt about an entity&s ability to continue as a going concern for a reasonable #eriod of time
Fowever, the @1- disclosures are ade'uate
0 +he #rinci#al auditor decides to refer to the wor" of another auditor, who audited a wholly
owned subsidiary of the entity and issued an un'ualified o#inion
5 An entity issues @1- that #resent financial #osition and results of o#erations but omits the
related statement of cash flows ;anagement discloses in the notes to the @1- that it does not
believe the statement of cash flows to be useful
7 An entity changes its de#reciation method for #roduction e'ui#ment from -L to units of
#roduction based on hours of utili,ation +he auditor concurs with the change, although it has a
material effect on the com#arability of the entity&s @1-
< An entity is a defendant in a lawsuit alleging infringement of certain #atent rights Fowever,
management cannot reasonably estimate the ultimate outcome of the litigation +he auditor
believes that there is a reasonable #ossibility of a significant material loss, but the lawsuit is
ade'uately disclosed in the notes to the @1-
> An entity discloses certain lease obligations in the notes to the @1- +he auditor believes that
the failure to ca#itali,e these leases is a de#arture from 8AA*
? +he entity wishes to show com#arative @1- and include the #rior year Fowever, the #rior year
@1- contained a 'ualification due to an ina##ro#riate method of 8AA* Accordingly,
management corrected the #rior year 8AA* deficiency and included the u#dated numbers in the
com#arative financials for the current year
13 +he entity wishes to show com#arative @1- and include the #rior year Fowever, the #rior
year @1- were audited by another auditor who refuses to reissue his o#inion
3(
$o#yright 2 (310 *earson 4ducation
List A
O#inion $hoices
List !
Ge#ort ;odification $hoices
A Iualified
F %escribe the circumstances in an
e6#lanatory #aragra#h preceding the
o#inion #aragra#h w1o modifying the
three standard #aragra#hs
! Cn'ualified
: %escribe the circumstances in the
o#inion #aragra#h w1o adding an
e6#lanatory #aragra#h
$ Adverse
A %escribe the circumstances in an
e6#lanatory #aragra#h preceding the
o#inion #aragra#h and modify the
o#inion #aragra#h
% %isclaimer
P %escribe the circumstances in an
e6#lanatory #aragra#h follo'ing the
o#inion #aragra#h and modify the
o#inion #aragra#h
4 4ither Iualified or Adverse
L %escribe the circumstances in an
e6#lanatory #aragra#h preceding the
o#inion #aragra#h and modify the sco#e
M o#inion #aragra#h
@ 4ither %isclaimer or Adverse
; %escribe the circumstances in an
e6#lanatory #aragra#h follo'ing the
o#inion #aragra#h and modify the sco#e
M o#inion #aragra#h
8 4ither Iualified or %isclaimer
. %escribe the circumstances in the
sco#e #aragra#h w1o adding an
e6#lanatory #aragra#h
O %escribe the circumstances in an
e6#lanatory #aragra#h follo'ing the
o#inion #aragra#h w1o modifying the
three standard #aragra#hs
* %escribe the circumstances in the
introductory #aragra#h w1o adding an
e6#lanatory #aragra#h

I %escribe the circumstances in the

introductory #aragra#h w1o adding an
e6#lanatory #aragra#h, and modify the
sco#e M o#inion #aragra#hs
G :ssue the standard auditor&s re#ort w1o
modification
- .one of the above
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$o#yright 2 (310 *earson 4ducation
Answer:
1 !, G
( A, L
3 !, :
0 !, I
5 A, A
7 !, :
< !, G
> 4, A
? !, F
13 !, G
Learning Objective 3->
1) =hen accounting #rinci#les are not consistently a##lied, and the materiality level is
immaterial, the auditor will issue aEn):
A) un'ualified o#inion
!) un'ualified o#inion with an e6#lanatory #aragra#h
$) adverse o#inion
%) disclaimer o#inion
Answer: A
() +he first ste# to be followed when deciding the a##ro#riate audit re#ort in a given set of
circumstances is to:
A) decide the a##ro#riate ty#e of re#ort for the condition
!) write the re#ort
$) determine whether any conditions e6ists re'uiring a de#arture from a standard un'ualified
re#ort
%) decide the materiality for each condition
Answer: $
3) :n most audits, the auditor issues a:
A) 'ualified audit re#ort
!) un'ualified audit re#ort
$) sco#e limited audit re#ort
%) adverse audit re#ort
Answer: !
0) ;ore than one modification should be included in the audit re#ort when:
A) the auditor is not inde#endent and the auditor "nows that the com#any has not followed
generally acce#ted accounting #rinci#les
!) there is substantial doubt about the going concern of the com#any and information about the
causes of the uncertainties is not ade'uately disclosed in the footnotes
$) there is a sco#e limitation and there is substantial doubt about the com#any&s ability to
continue as a going concern
%) all of the above
Answer: %
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$o#yright 2 (310 *earson 4ducation
5) =hen there is a justified de#arture from 8AA* which is considered material, the auditor
should issue aEn):
A) standard un'ualified audit re#ort
!) disclaimer of o#inion
$) un'ualified audit re#ort with an e6#lanatory #aragra#h
%) adverse o#inion
Answer: $
7) :f there is a deviation in the statements& #re#aration in accordance with 8AA* and another
accounting #rinci#le was a##lied on a basis that was not consistent with that of the #receding
year:
A) the auditor must choose which modification to include in the audit re#ort
!) only the most material modification can be disclosed
$) more than one modification should be included in the re#ort
%) none of the above
Answer: $
<) After the auditor determines whether any conditions e6ist which re'uire a de#arture from a
standard un'ualified re#ort, the ne6t ste# in the decision #rocess for audit re#orts is to:
A) write the re#ort
!) decide the materiality for each condition
$) decide the a##ro#riate ty#e of re#ort for the condition
%) discuss the re#ort with management
Answer: !
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$o#yright 2 (310 *earson 4ducation