Auditing Questions and Answers
Audit Reports
1)
Explain why auditors’ reports are important to users of financial statements and why it is desirable to have
standard wording.
&: Auditor’s reports are important to users of financial statements because they inform users of the auditor�...
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Auditing Questions andAnswers
Audit Reports
1) Explain why auditors’ reports are important to users of financial statements and why it is desirable to have
standard wording.
&: Auditor’s reports are important to users of financial statements because they inform users of the auditor’s opinion as
to whether or not the statements are fairly stated or whether no conclusion can be made with regard to the fairness of
their presentation. Users especially look for any deviation from the wording of the standard unqualified report and the
reasons and implications of such deviations. Having standard wording improves communications for the benefit of user
of the auditor’s report. When there are departures from the standard wording, users are more likely to recognize and
consider situations requiring a modification or qualification to the auditor’s report or opinion.
2) List the seven parts of a standard unqualified audit report and explain the meaning of each part. How do
the parts compare with those found in qualified report?
&: The unqualified audit report consists of:
1. Report title Auditing standards require that the report be titled and that the title includes the word independent.
2. Audit report address The report is usually addressed to the company, its stockholders, or the board of directors.
3. Introductory paragraph The first paragraph of the report does three things: first, it makes the simple statement
that the CPA firm has done an audit. Second, it lists the financial statements that were audited, including the bal.
ance sheet dates and the accounting periods for the income statement and statement of cash flows. Third, it states
that the statements are the responsibility of management and that the auditor’s responsibility is to express an
opinion on the statements based on an audit.
4. Scope paragraph. The scope paragraph is a factual statement about what the auditor did in the audit. The remain
der briefly describes important aspects of an audit.
5. Opinion paragraph. The final paragraph in the standard report states the auditor’s conclusions based on the result
of the audit.
6. Name of CPA firm. The name identifies the CPA firm or practitioner who performed the audit.
7. Audit report date. The appropriate date for the report is the one on which the auditor has completed the most im
portant auditing procedures in the field.
The same seven parts are found in a qualified report as in an unqualified report. There are also often one or more addi
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tional paragraphs explaining reasons for the qualifications.
3) What are the purposes of the scope paragraph in the auditor’s report? Identify the most important infor
mation included in the scope paragraph.
&: The purposes of the scope paragraph in the auditor’s report are to inform the financial statement users that the audit
was conducted in accordance with generally accepted auditing standards, in general terms what those standards mean,
and whether the audit provides a reasonable basis for an opinion.
The information in the scope paragraph includes:
1. The auditor followed generally accepted auditing standards.
2. The audit is designed to obtain reasonable assurance about whether the statements are free of material misstate
ment.
3. Discussion of the audit evidence accumulated.
4. Statement that the auditor believes the evidence accumulated was appropriate for the circumstances to express
the opinion presented.
4) What are the purposes of the opinion paragraph in the auditor’s report? Identify the most important infor
mation included in the opinion paragraph.
&: The purpose of the opinion paragraph is to state the auditor’s conclusions based upon the results of the audit evi.
dence. The most important information in the opinion paragraph includes:
1. The words “in our opinion” which indicate that the conclusions are based on professional judgment.
2. A restatement of the financial statements that have been audited and the dates thereof or a reference to the intro
ductory paragraph.
3. A statement about whether the financial statements were presented fairly and in accordance with generally ac.
cepted accounting principles.
5) On February 17, 2006, a CPA completed the field work on the financial statements for the Buckheizer Tech
nology Corporation for the year ended December 31, 2005. The audit in satisfactory in all respects except for the
existence of a change in accounting principle from FIFO to LIFO inventory valuation., which results in an ex7
planatory paragraph to consistency. On February 26, the auditor completed the tax return and the draft of the
financial statements. The final audit report was completed, attached to the financial statements, and delivered
to the client on March 7. What is the appropriate date on the auditor’s report?
&: The auditor’s report should be dated February 17, 2006, the date on which the auditor completed the most important
auditing procedures in the field.
6) What five circumstances are required for a standard unqualified report to be issued?
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&: An unqualified report may be issued under the following five circumstances:
1. All statements—balance sheet, income statement, statement of retained earnings, and statement of cash
flows—are included in the financial statements.
2. The three general standards have been followed in all respects on the engagement.
3. Sufficient evidence has been accumulated and the auditor has conducted the engagement in a manner that en.
ables him or her to conclude that the three standards of field work have been met.
4. The financial statements are presented in accordance with generally accepted accounting principles. This also
means that adequate disclosures have been included in the footnotes and other parts of the financial statements.
5. There are no circumstances requiring the addition of an explanatory paragraph or modification of the wording of
the report.
7) Describe the additional information included in the introductory, scope, and opinion paragraphs in a com
bined audit report on financial statements and the effectiveness of internal control over financial reporting.
What is the nature of the additional paragraphs in the audit report?
&: The introductory, scope and opinion paragraphs are modified to include reference to management’s report on interna
control over financial reporting, and the scope of the auditor’s work and opinion on internal control over financial report
ing. The introductory and opinion paragraphs also refer to the framework used to evaluate internal control. Two addi.
tional paragraphs are added between the scope and opinion paragraphs that define internal control and describe the in
herent limitations of internal control.
8) What type of opinion should an auditor issue when the financial statements are not in accordance with
GAAP because such adherence would result in misleading statements?
&: When adherence to generally accepted accounting principles would result in misleading financial statements there
should be a complete explanation in a separate paragraph. The separate paragraph should fully explain the departure
and the reason why generally accepted accounting principles would have resulted in misleading statements. The opinion
should be unqualified, but it should refer to the separate paragraph during the portion of the opinion in which generally
accepted accounting principles are mentioned.
9) Distinguish between an unqualified report with explanatory paragraph or modified wording and a qualifi
report. Give examples when an explanatory paragraph or modified wording should be used in an unqualified
opinion.
&: An unqualified report with an explanatory paragraph or modified wording is the same as a standard unqualified repor
except that the auditor believes it is necessary to provide additional information about the audit or the financial state.
ments. For a qualified report, either there is a scope limitation (condition 1) or a failure to follow generally accepted ac
counting principles (condition 2). Under either condition, the auditor concludes that the overall financial statements are
fairly presented.
Two examples of an unqualified report with an explanatory paragraph or modified wording are:
1. The entity changed from one generally accepted accounting principle to another generally accepted accounting
principle.
2. A shared report involving the use of other auditors.
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10) Describe what is meant by a reports involving the use of other auditors. What are the three options avail7
able to the principal auditor and when should each be used?
&: When another CPA has performed part of the audit, the primary auditor issues one of the following types of reports
based on the circumstances.
1. No reference is made to the other auditor. This will occur if the other auditor audited an immaterial portion of the
statement, the other auditor is known or closely supervised, or if the principal auditor has thoroughly reviewed the
other auditor’s work.
2. Issue a shared opinion in which reference is made to the other auditor. This type of report is issued when it is im
practical to review the work of the other auditor or when a portion of the financial statements audited by the other
CPA is material in relation to the total.
3. The report may be qualified if the principal auditor is not willing to assume any responsibility for the work of the
other auditor. A disclaimer may be issued if the segment audited by the other CPA is highly material.
11) The client has restated the prior7year statements because of a change from LIFO to FIFO. How should be this
reflected in the auditor’s report?
&: Even though the prior year statements have been restated to enhance comparability, a separate explanatory para.
graph is required to explain the change in generally accepted accounting principles in the first year in which the change
took place.
12) Distinguish between changes that affect consistency and those that may affect comparability but not con
sistency. Give an example of each.
&: Changes that affect the consistency of the financial statements may involve any of the following:
1. Change in accounting principle
2. Change in reporting entity
3. Corrections of errors involving accounting principles.
An example of a change that affects consistency would be a change in the method of computing depreciation from
straight line to an accelerated method. A separate explanatory paragraph is required if the amounts are material.
Comparability refers to items such as changes in estimates, presentation, and events rather than changes in accounting
principles. For example, a change in the estimated life of a depreciable asset will affect the comparability of the state.
ments. In that case, no explanatory paragraph for lack of consistency is needed, but the information may require disclo
sure in the statements.
13) List the three conditions that require a departure from unqualified opinion and give one specific example of
each those conditions.
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