Description INSTANT DOWNLOAD SOLUTION MANUAL FOR AUDITING AND ASSURANCE SERVICES 14E BY ARENS Auditing and Assurance Services 14 th edition Chapter 1 1-1 (Objective 1-5) Explain the relationships among audit services, attestation services, and assurance services, and give examples of each. 1-2 (Objective 1-3) Discuss the major factors in today’s society that have made the need for independent audits much greater than it was 50 years ago. 1-3 (Objective 1-3) Distinguish among the following three risks: risk-free interest rate, business risk, and information risk. Which one or ones does the auditor reduce by per- forming an audit? 1-4 (Objective 1-4) Identify the major causes of information risk and identify the three main ways information risk can be reduced.

• Auditing Arens Ppt

What are the advantages and disadvantages of each? 1-5 (Objective 1-1) Explain what is meant by determining the degree of correspondence between information and established criteria. What are the information and established criteria for the audit of Jones Company’s tax return by an internal revenue agent? What are they for the audit of Jones Company’s financial statements by a CPA firm? 1-6 (Objectives 1-1, 1-7) Describe the nature of the evidence the internal revenue agent will use in the audit of Jones Company’s tax return. 1-7 (Objective 1-2) In the conduct of audits of financial statements, it would be a serious breach of responsibility if the auditor did not thoroughly understand accounting.

However, many competent accountants do not have an understanding of the auditing process. What causes this difference? 1-8 (Objective 1-6) What are the differences and similarities in audits of financial state- ments, compliance audits, and operational audits? 1-9 (Objectives 1-6, 1-7) List five examples of specific operational audits that can be conducted by an internal auditor in a manufacturing company. 1-10 (Objectives 1-5, 1-6) What knowledge does the auditor need about the client’s business in an audit of historical financial statements? Explain how this knowledge may be useful in performing other assurance or consulting services for the client. 1-11 (Objective 1-7) What are the major differences in the scope of the audit respon- sibilities for CPAs, GAO auditors, IRS agents, and internal auditors?

1-12 (Objective 1-8) Identify the four parts of the Uniform CPA Examination. 1-13 (Objective 1-5) Explain why CPAs need to be knowledgeable about information technology, including e-commerce technologies. A report stating whether the company has complied with restrictive covenants related to officer compensation and payment of dividends contained in a bank loan agreement.

An electronic seal indicating that an electronic seller observes certain practices. A report indicating whether a governmental entity has complied with certain government regulations. A report on the examination of a financial forecast.

A review report that provides limited assurance about whether financial statements are fairly stated in accordance with U.S. A report on management’s assertion on the company’s level of carbon emissions. A report about management’s assertion on the effectiveness of controls over the availability, reliability, integrity, and maintainability of its accounting information system. An evaluation of the effectiveness of key measures used to assess an entity’s success in achieving specific targets linked to an entity’s strategic plan and vision. Explain or use a diagram to indicate the relationships among audit services, attesta- Required tion services, and assurance services. For each of the services listed above, indicate the type of service from the list that follows. (1) An audit of historical financial statements.

(2) An attestation service other than an audit service. (3) An assurance service that is not an attestation service.

1-17 (Objective 1-3) Busch Corporation has an existing loan in the amount of $4.5 million with an annual interest rate of 5.5%. The company provides an internal company-prepared financial statement to the bank under the loan agreement. Two competing banks have offered to replace Busch Corporation’s existing loan agreement with a new one. United National Bank has offered to loan Busch $4.5 million at a rate of 4.5% but requires Busch to provide financial statements that have been reviewed by a CPA firm. First City Bank has Chapter 1 / THE DEMAND FOR AUDIT AND OTHER ASSURANCE SERVICES 21 22 Required offered to loan Busch $4.5 million at a rate of 3.5% but requires Busch to provide financial statements that have been audited by a CPA firm. Busch Corporation’s controller approached a CPA firm and was given an estimated cost of $20,000 to perform a review and $45,000 to perform an audit. Explain why the interest rate for the loan that requires a review report is lower than that for the loan that did not require a review.

Explain why the interest rate for the loan that requires an audit report is lower than the interest rate for the other two loans. Calculate Busch Corporation’s annual costs under each loan agreement, including interest and costs for the CPA firm’s services. Indicate whether Busch should keep its existing loan, accept the offer from United National Bank, or accept the offer from First City Bank. Assume that United National Bank has offered the loan at a rate of 4.0% with a review, and the cost of the audit has increased to $55,000 due to new auditing standards requirements. Indicate whether Busch should keep its existing loan, accept the offer from United National Bank, or accept the offer from First City Bank.

Discuss why Busch may desire to have an audit, ignoring the potential reduction in interest costs. Explain how a strategic understanding of the client’s business may increase the value of the audit service. 1-18 (Objectives 1-3, 1-4, 1-5) Consumers Union is a nonprofit organization that provides information and counsel on consumer goods and services. A major part of its function is the testing of different brands of consumer products that are purchased on the open market and then the reporting of the results of the tests in Consumer Reports, a monthly publication. Examples of the types of products it tests are middle-sized automobiles, residential dehumidifiers, flat-screen TVs, and boys’ jeans.

InAwphat wgaoys arePthDeFserviEcesnphrovaidnedcbey Cronsumers Union similar to assurance services provided by CPA firms?. Compare the concept of information risk introduced in this chapter with the infor- mation risk problem faced by a buyer of an automobile. Compare the four causes of information risk faced by users of financial statements as discussed in this chapter with those faced by a buyer of an automobile. Compare the three ways users of financial statements can reduce information risk with those available to a buyer of an automobile. 1-19 (Objective 1-1) James Burrow is the loan officer for the National Bank of Dallas. National has a loan of $325,000 outstanding to Regional Delivery Service, a company specializing in delivering products of all types on behalf of smaller companies. National’s collateral on the loan consists of 25 small delivery trucks with an average original cost of $24,000.

Burrow is concerned about the collectibility of the outstanding loan and whether the trucks still exist. He therefore engages Samantha Altman, CPA, to count the trucks, using registration information held by Burrow.

She was engaged because she spends most of her time auditing used automobile and truck dealerships and has extensive specialized knowledge about used trucks. Burrow requests that Altman issue a report stating the following:. Which of the 25 trucks is parked in Regional’s parking lot on the night of June 30, 2011. Whether all of the trucks are owned by Regional Delivery Service. The condition of each truck, using the guidelines of poor, good, and excellent. The fair market value of each truck, using the current “blue book” for trucks, which states the approximate wholesale prices of all used truck models, and also using the poor, good, and excellent condition guidelines.

Required Part 1 / THE AUDITING PROFESSION a. For each of the following parts of the definition of auditing, state which part of the preceding narrative fits the definition: (1) Information (2) Established criteria (3) Accumulating and evaluating evidence (4) Competent,independentperson (5) Reporting results. Identify the greatest difficulties Virms is likely to have doing this audit. 1-20 (Objective 1-7) Five college seniors with majors in accounting are discussing alter- native career plans. The first senior plans to become an internal revenue agent because his primary interest is income taxes.

He believes the background in tax auditing will provide him with better exposure to income taxes than will any other available career choice. The second senior has decided to go to work for a CPA firm for at least 5 years, possibly as a permanent career.

She believes the variety of experience in auditing and related fields offers a better alternative than any other available choice. The third senior has decided on a career in internal auditing with a large industrial company because of the many different aspects of the organization with which internal auditors become involved.

The fourth senior plans to become an auditor for the GAO because she believes that this career will provide excellent experience in computer risk assessment techniques. The fifth senior plans to pursue some aspect of auditing as a career but has not decided on the type of organization to enter. He is especially interested in an opportunity to continue to grow professionally, but meaningful and interesting employment is also a consideration. What are the major advantages and disadvantages of each of the four types of auditing careers?

Required. What other types of auditing careers are available to those who are qualified? 1-21 (Objectives 1-6, 1-7) In the normal course of performing their responsibilities, auditors often conduct audits or revieAwspofathge followPinDg: F Enhancer. Federal income tax returns of an officer of the corporation to determine whether he or she has included all taxable income in his or her return. Disbursements of a branch of the federal government for a special research project to determine whether it would have been possible to accomplish the same research results at a lower cost to the taxpayers. Computer operations of a corporation to evaluate whether the computer center is being operated as efficiently as possible. Annual statements for the use of management.

Operations of the IRS to determine whether the internal revenue agents are using their time efficiently in conducting audits. Statements for bankers and other creditors when the client is too small to have an audit staff. Financial statements of a branch of the federal government to make sure that the statements present fairly the actual disbursements made during a period of time. Federal income tax returns of a corporation to determine whether the tax laws have been followed. Financial statements for use by stockholders when there is an internal audit staff. A bond indenture agreement to make sure a company is following all requirements of the contract. The computer operations of a large corporation to evaluate whether the internal controls are likely to prevent misstatements in accounting and operating data.

Auditing Arens Ppt

Disbursements of a branch of the federal government for a special research project to determine whether the expenditures were consistent with the legislative bill that authorized the project. For these 12 examples, state the most likely type of auditor (CPA, GAO, IRS, or internal) to perform each. Required Chapter 1 / THE DEMAND FOR AUDIT AND OTHER ASSURANCE SERVICES Required 23 Required. In each example, state the type of audit (financial statement audit, operational audit, or compliance audit). 1-22 (Objectives 1-3, 1-5) Dave Czarnecki is the managing partner of Czarnecki and Hogan, a medium-sized local CPA firm located outside of Chicago. Over lunch, he is surprised when his friend James Foley asks him, “Doesn’t it bother you that your clients don’t look forward to seeing their auditors each year? Dave responded, “Well, auditing is only one of several services we provide.

Most of our work for clients does not involve financial statement audits, and our audit clients seem to like interacting with us.”. Identify ways in which a financial statement audit adds value for clients. List other services other than audits that Czarnecki and Hogan likely provides. Assume Czarnecki and Hogan has hired you as a consultant to identify ways in which they can expand their practice. Identify at least one additional service that you believe the firm should provide and explain why you believe this represents a growth opportunity for CPA firms. INTERNET PROBLEM 1-1: CPA REQUIREMENTS Required Individuals are licensed as CPAs by individual states. Information on the requirements for each state can be found on the National Association of State Boards of Accountancy (NASBA) web site (www.nasba.org).

The Uniform CPA Examination is administered by the American Institute of Certified Public Accountants (AICPA), and information on CPA examination requirements can be found on the AICPA web site (www.aicpa.org). Identify the education requirements to be eligible to sit for the CPA exam in your state. Include any specific educational content requirements. Part 1 / THE AUDITING PROFESSION.

List any frequently asked questions (FAQ) for your state, if there are any. What are the Elijah Watts Sells awards?.

What was the passing rate for each exam section in the most recent quarter? Chapter 2 2-1 (Objective 2-1) State the four major types of services CPAs perform, and explain each. 2-2 (Objectives 2-1, 2-7) What major characteristics of the organization and conduct of CPA firms permit them to fulfill their social function competently and independently?

2-3 (Objective 2-2) What is the role of the Public Company Accounting Oversight Board? 2-4 (Objective 2-3) Describe the role of the SEC in society and discuss its relationship with and influence on the practice of auditing. 2-5 (Objective 2-4) What roles are played by the American Institute of Certified Public Accountants for its members? Part 1 / THE AUDITING PROFESSION 40 2-6 (Objective 2-4) What are the purposes of the AICPA Statements on Standards for Attestation Engagements? 2-7 (Objectives 2-2, 2-4, 2-5) Who is responsible for establishing auditing standards for audits of U.S.

Public companies? Who is responsible for establishing auditing standards for U.S. Private companies? 2-8 (Objective 2-6) Distinguish between generally accepted auditing standards and gen- erally accepted accounting principles, and give two examples of each. 2-9 (Objective 2-6) The first standard of field work requires the performance of the audit by a person or persons having adequate technical training and proficiency as an auditor. What are the various ways in which auditors can fulfill the requirement of the standard?

2-10 (Objective 2-6) Generally accepted auditing standards have been criticized by different sources for failing to provide useful guidelines for conducting an audit. The critics believe the standards should be more specific to enable practitioners to improve the quality of their performance. As the standards are now stated, some critics believe that they provide little more than an excuse to conduct inadequate audits. Evaluate this criticism of the 10 generally accepted auditing standards. 2-11 (Objective 2-5) Describe the role of International Standards on Auditing. What is the relationship between International Standards on Auditing and U.S. Generally Accepted Auditing Standards?

2-12 (Objective 2-7) What is meant by the term quality control as it relates to a CPA firm? 2-13 (Objective 2-7) The following is an example of a CPA firm’s quality control procedure requirement: “Any person being considered for employment by the firm must have completed a basic auditing course and have been interviewed and approved by an audit partner of the firm before he or she can be hired for the audit staff.” Which element of quality control does this procedure affect and what is the purpose of the requirement? 2-14 (Objective 2-7) State what is meant by the term peer review. What are the implications of peer review for the profession? 2-15 (Objective 2-7) What are the two AICPA resource centers to which CPA firms may belong? What are the primary purposes of the two centers? DISCUSSION QUESTIONS AND PROBLEMS 2-18 (Objectives 2-2, 2-7) The following comments summarize the beliefs of some practitioners about the Sarbanes–Oxley Act and the PCAOB.

The Sarbanes–Oxley Act is unnecessary regulation of the profession. The costs of requirements such as reporting on the effectiveness of internal control over financial reporting greatly exceed the benefits. These increased costs will discourage companies from issuing publicly traded stock in the United States. The regulation also gives a competitive advantage to national CPA firms because they are best prepared to meet the increased requirements of the Act. Three things already provide sufficient assurance that quality audits are performed without PCAOB oversight. They are competitive pressures to do quality work, legal liability for inadequate performance, Part 1 / THE AUDITING PROFESSION 42 and a code of professional conduct requiring that CPA firms follow generally accepted auditing standards. State the pros and cons of those comments.

Evaluate whether the Sarbanes–Oxley Act and PCAOB regulation are worth their cost. 2-19 (Objective 2-7) For each of the following procedures taken from the quality control manual of a CPA firm, identify the applicable element of quality control from Table 2-4 on page 38. Appropriate accounting and auditing research requires adequate technical reference materials. Each firm professional has online password access through the firm’s Internet Web site to electronic reference materials on accounting, auditing, tax, SEC, and other technical information, including industry data. Each office of the firm shall be visited at least annually by review persons selected by the director of accounting and auditing.

Procedures to be undertaken by the reviewers are illustrated by the office review program. All potential new clients are reviewed before acceptance. The review includes consultation with predecessor auditors, and background checks. All new clients are approved by the firm management committee, including assessing whether the firm has the technical competence to complete the engagement. Each audit engagement must include a concurring partner review of critical audit decisions. Audit engagement team members enter their electronic signatures in the firm’s engagement management software to indicate the completion of specific audit program steps. At the end of the audit engagement, the engagement management software will not allow archiving of the engagement file until all audit program steps have been electronically signed.

At all stages of any engagemenAt, apnaeffgorot is mPadDeFto inEvonlvehparofnesscioenarl staff at appropriate levels in the accounting and auditing decisions. Various approvals of the manager or senior accountant are obtained throughout the audit. No employee will have any direct or indirect financial interest, association, or rela- tionship (for example, a close relative serving a client in a decision-making capacity) not otherwise disclosed that might be adverse to the firm’s best interest. Individual partners submit the nominations of those persons whom they wish to be considered for partner. To become a partner, an individual must have exhibited a high degree of technical competence; must possess integrity, motivation, and judgment; and must have a desire to help the firm progress through the efficient dispatch of the job responsibilities to which he or she is assigned. Through our continuing employee evaluation and counseling program and through the quality control review procedures as established by the firm, educational needs are reviewed and formal staff training programs modified to accommodate changing needs. At the conclusion of practice office reviews, apparent accounting and auditing deficiencies are summarized and reported to the firm’s director of personnel.

The firm’s mission statement indicates its commitment to quality, and this commit- ment is emphasized in all staff training programs. 2-20 (Objectives 2-2, 2-3, 2-6) The Howard Mobile Home Manufacturing Company is audited by Olson and Riley, CPAs. Howard Mobile Home has decided to issue stock to the public and wants Olson and Riley to perform all the audit work necessary to satisfy the requirements for filing with the SEC. Olson and Riley has never had a client go public before. What factors should Olson and Riley consider before accepting the engagement?.

List additional issues confronting auditors of companies that file with the SEC as compared to dealing with a private company audit client. Required Chapter 2 / THE CPA PROFESSION 43 Required 2-21 (Objective 2-6) Ray, the owner of a small company, asked Holmes, a CPA, to conduct an audit of the company’s records.

Ray told Holmes that an audit was to be completed in time to submit audited financial statements to a bank as part of a loan application. Holmes immediately accepted the engagement and agreed to provide an auditor’s report within 3 weeks. Ray agreed to pay Holmes a fixed fee plus a bonus if the loan was granted. Holmes hired two accounting students to conduct the audit and spent several hours telling them exactly what to do.

Holmes told the students not to spend time reviewing internal controls but instead to concentrate on proving the mathematical accuracy of the ledger accounts and summarizing the data in the accounting records that support Ray’s financial statements. The students followed Holmes’s instructions and after 2 weeks gave Holmes the financial statements, which did not include footnotes. Holmes reviewed the statements and prepared an unqualified auditor’s report. The report did not refer to generally accepted accounting principles or to the consistent application of such principles. Briefly describe each of the 10 generally accepted auditing standards and indicate how the action(s) of Holmes resulted in a failure to comply with each standard. Organize your answer as follows:.

Holmes’ Actions Resulting in Failure Brief Description of GAAS to Comply with GAAS 2-22 (Objective 2-5) For each engagement described below, indicate whether the engage- ment is likely to be conducted under international auditing standards, U.S. Generally accepted auditing standards, or PCAOB auditing standards. An audit of a U.S. Private company with no public equity or debt. An audit of a German private company with public debt in Germany. An audit of a U.S.

Public company. An audit of a United Kingdom public company that is listed in the United States and whose financial statements will be filed with the SEC. An audit of a U.S. Not-for-profit organization. An audit of a U.S. Private company to be used for a loan from a publicly-traded bank.

An audit of a U.S public company that is a subsidiary of a Japanese company that will be used for reporting by the parent company in Japan. An audit of a U.S. Private company that has publicly-traded debt. INTERNET PROBLEM 2-1: INTERNATIONAL AUDITING AND ASSURANCE STANDARDS BOARD Required International Standards on Auditing (ISAs) are issued by the International Auditing and Assurance Standards Board (IAASB). Use the IAASB web site (to learn more about the IAASB and its standard-setting activities.

What is the objective of the IAASB? Who uses International Standards on Auditing? Summarize the due process followed by the IAASB in setting standards. How is the IAASB committed to transparency in the standard-setting process? Chapter 3 Review Question 3-1 (Objective 3-1) Explain why auditors’ reports are important to users of financial statements and why it is desirable to have standard wording. 3-2 (Objective 3-1) 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 a qualified report?

3-3 (Objective 3-1) What are the purposes of the scope paragraph in the auditor’s report? Identify the most important information included in the scope paragraph.

3-4 (Objective 3-1) What are the purposes of the opinion paragraph in the auditor’s report? Identify the most important information included in the opinion paragraph. 3-5 (Objective 3-1) On February 17, 2012, a CPA completed all the evidence gathering procedures on the audit of the financial statements for the Buckheizer Technology Corporation for the year ended December 31, 2011. The audit is satisfactory in all respects except for the existence of a change in accounting principles from FIFO to LIFO inventory Part 1 / THE AUDITING PROFESSION 66 valuation, which results in an explanatory paragraph on 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?

3-6 (Objective 3-2) What five circumstances are required for a standard unqualified report to be issued? 3-7 (Objective 3-3) Describe the information included in the introductory, scope, and opinion paragraphs in a separate audit report on the effectiveness of internal control over financial reporting. What is the nature of the additional paragraphs in the audit report? 3-8 (Objectives 3-4, 3-7) 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? 3-9 (Objectives 3-4, 3-5) Distinguish between an unqualified report with an explanatory paragraph or modified wording and a qualified report. Give examples when an explanatory paragraph or modified wording should be used in an unqualified opinion.

3-10 (Objective 3-4) Describe what is meant by reports involving the use of other auditors. What are the three options available to the principal auditor and when should each be used? 3-11 (Objective 3-4) The client has restated the prior-year statements because of a change from LIFO to FIFO. How should this be reflected in the auditor’s report?

3-12 (Objective 3-4) Distinguish between changes that affect consistency and those that may affect comparability but not consistency. Give an example of each. 3-13 (Objective 3-5) List the three conditions that require a departure from an unqualified opinion and give one specific example of each of those conditions.

3-14 (Objective 3-5) Distinguish between a qualified opinion, an adverse opinion, and a disclaimer of opinion, and explain the circumstances under which each is appropriate. 3-15 (Objective 3-6) Define materiality as it is used in audit reporting. What conditions will affect the auditor’s determination of materiality? 3-16 (Objective 3-6) Explain how materiality differs for failure to follow GAAP and for lack of independence.

3-17 (Objective 3-7) How does the auditor’s opinion differ between scope limitations caused by client restrictions and limitations resulting from conditions beyond the client’s control? Under which of these two will the auditor be most likely to issue a disclaimer of opinion? 3-18 (Objective 3-5) Distinguish between a report qualified as to opinion only and one with both a scope and opinion qualification. 3-19 (Objectives 3-6, 3-7) Identify the three alternative opinions that may be appropriate when the client’s financial statements are not in accordance with GAAP. Under what circumstance is each appropriate? 3-20 (Objective 3-8) When an auditor discovers more than one condition that requires departure from or modification of the standard unqualified report, what should the auditor’s report include?

3-21 (Objective 3-9) The ISAs allow an auditor to include either of the following phrases in the auditor’s opinion paragraph: (1) “The financial statements present fairly in all material respects.” or (2) “The financial statements give a true and fair view of.”. Discuss whether the ASB should adopt a similar option for U.S. Audit standards. 3-22 (Objective 3-9) Discuss why the adoption of international accounting and auditing standards might be beneficial to investors and auditors. MULTIPLE CHOICE QUESTIONS FROM CPA EXAMINATIONS 3-23 (Objectives 3-1, 3-2, 3-3, 3-4, 3-8) The following questions concern unqualified audit reports. Choose the best response. Which of the following statements about a combined report on the financial state- ments and internal control over financial reporting is correct?

(1) The auditor’s opinion on internal control is for the same period of time as the opinion on the financial statements. (2) The report includes additional paragraphs for the definition and limitations of internal control.

(3) The introductory, scope, and opinion paragraphs are unchanged from a report for an audit of the financial statements only. (4) GAAP is the framework used to evaluate internal control. The date of the CPA’s opinion on the financial statements of the client should be the date of the (1) (2) (3) (4) closing of the client’s books. Finalization of the terms of the audit engagement. Completion of all important audit procedures. Submission of the report to the client. If a auditor, he or she is required to disclose the (1) name of the other auditor.

(2) nature of the inquiry into the other auditor’s professional standing and extent of the review of the other auditor’s work. (3) portion of the financial statements audited by the other auditor. (4) reasonsforbeingunwillingtoassumeresponsibilityfortheotherauditor’swork.

Principal auditor decides to refer in his or her report to the audit of another 3-24 (Objectives 3-4, 3-8) The following questions concern unqualified audit reports with an explanatory paragraph or modified wording. Choose the best response. Part 1 / THE AUDITING PROFESSION. An entity 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 substantial 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) (1) qualified opinion. (2) unqualified opinion with explanatory paragraph. (3) unqualified opinion. (4) qualified opinion with explanatory paragraph regarding consistency.

While the Caldina has never been officially exported by Toyota outside Japan, its 4WD capability and large capacity have made it a popular grey import in Australia, New Zealand, Russia and many South American countries. (December 2009) () The Toyota Caldina is an automobile manufactured by for the Japanese market and released in 1992. The Caldina was discontinued in 2007, with the wagon assuming the market position previously held by the Caldina. Toyota caldina zt 2017 manual. It replaced the and wagons, and was sold at both and Toyopet Store locations in Japan.

When the financial statements are fairly stated but the auditor concludes there is sub- stantial doubt whether the client can continue in existence, the auditor should issue a(an) (1) adverse opinion. (2) qualified opinion only. (3) unqualified opinion. (4) unqualified opinion with explanatory paragraph. The introductory paragraph of an auditor’s report contains the following: “We did not audit the financial statements of EZ Inc., a wholly owned subsidiary, which statements reflect total assets and revenues constituting 27 percent and 29 percent, respectively, of the consolidated totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for EZ Inc., is based solely on the report of the other auditors.” These sentences (1) indicate a division of responsibility. (2) assume responsibility for the other auditor.

(3) require a departure from an unqualified opinion. (4) are an improper form of reporting.

68 3-25 (Objectives 3-5, 3-7, 3-8) The following questions concern audit reports other than unqualified audit reports with standard wording. Choose the best response.

The annual audit of Midwestern Manufacturing revealed that sales were accidentally being recorded as revenue when the goods were ordered, instead of when they were shipped. Assuming the amount in question is material and the client is unwilling to correct the error, the CPA should issue: (1) an unqualified opinion or adverse opinion. (2) aqualified“exceptfor”opinionordisclaimerofopinion. (3) aqualified“exceptfor”opinionoradverseopinion. (4) an unqualified opinion with an explanatory paragraph. Under which of the following circumstances would a disclaimer of opinion not be appropriate?

(1) The auditor is unable to determine the amounts associated with an employee fraud scheme. (2) Managementdoesnotprovidereasonablejustificationforachangeinaccounting principles. (3) The client refuses the auditor permission to confirm certain accounts receivable or apply alternative procedures to verify their balances. (4) The chief executive officer is unwilling to sign the management representation letter. The opinion paragraph of a CPA’s report states: “In our opinion, except for the effects of not capitalizing certain lease obligations, as discussed in the preceding paragraph, the financial statements present fairly,” in all material respects,.

This paragraph expresses a(an) (1) Unqualified opinion. (2) Unqualified opinion with explanatory paragraph. (3) Qualified opinion. (4) Adverse opinion. DISCUSSION QUESTIONS AND PROBLEMS 3-26 (Objective 3-1) A careful reading of an unqualified report indicates several important phrases.

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