An auditor most likely would express an unqualified opinion and would not add explanatory language to the report if the auditor:
Choice 'd' is correct. An auditor most likely would express an unqualified opinion and would not add explanatory language to the report if the auditor believes that there is a probable likelihood of a material loss resulting from an uncertainty that is sufficiently supported and disclosed.
Choice 'a' is incorrect. Emphasis of a matter, such as the existence of significant transactions with related parties, may result in an additional explanatory paragraph appended to an otherwise unqualified opinion.
Choice 'b' is incorrect. A change in accounting principle does result in an additional explanatory paragraph appended to an otherwise unqualified opinion.
Choice 'c' is incorrect. Omission of supplemental information required by GAAP does result in an additional explanatory paragraph appended to an otherwise unqualified opinion.
An auditor who discovers that client employees have committed an illegal act that has a material effect on the client's financial statements most likely would withdraw from the engagement if:
Cooper, CPA, believes there is substantial doubt about the ability of Zero Corp. to continue as a going concern for a reasonable period of time. In evaluating Zero's plans for dealing with the adverse effects of future conditions and events, Cooper most likely would consider, as a mitigating factor, Zero's plans to:
Choice 'd' is correct. When assessing management's plans for dealing with the adverse effects of future conditions and events, mitigating factors would include:
1. The postponement of expenditures (including R&D),
2. Plans to dispose of assets,
3. Plans to borrow money or restructure debt,
4. Plans to increase ownership equity (sell stock).
Choice 'a' is incorrect. Discussions with lenders regarding terms would not be a mitigating factor. Actual agreements regarding restructuring of debt or amendments to covenants would be required.
Choice 'b' is incorrect. Strengthening internal controls over cash would not qualify as a management tactic to address going concern issues.
Choice 'c' is incorrect. Purchasing facilities which are currently being leased would only further decrease cash flow.
Due to a scope limitation, an auditor disclaimed an opinion on the financial statements taken as a whole, but the auditor's report included a statement that the current asset portion of the entity's balance sheet was fairly stated. The inclusion of this statement is:
Choice 'a' is correct. Piecemeal opinions (opinions on parts of the financial statements, when those parts constitute a major portion of the financial statements) are not appropriate if the auditor has disclaimed an opinion or issued an adverse opinion, because they may overshadow the auditor's opinion on the financial statements taken as a whole. An opinion on specified elements that does not constitute a piecemeal opinion may be expressed, but should not accompany the disclaimer of opinion or the adverse opinion.
Choice 'b' is incorrect. The auditor may express an opinion on one financial statement, even if the auditor must issue a disclaimer on the financial statements taken as a whole.
Choice 'c' is incorrect. Even with adequate description in the scope paragraph, an opinion on the current asset portion of the balance sheet cannot be included in a disclaimer of opinion, as it might overshadow the disclaimer.
Choice 'd' is incorrect. It is not appropriate to include an opinion on the current asset portion of the balance sheet in a disclaimer of opinion, as it might overshadow the disclaimer.
Which of the following statements describes an auditor's obligation to identify deficiencies in the design or operation of internal control?
Choice 'd' is correct. The auditor need not search for significant deficiencies in internal control, but should document and communicate any such deficiencies that are discovered.
Choice 'a' is incorrect. Tests of controls are designed and applied to evaluate the risk of financial statement misstatement, and to determine the nature, timing, and extent of substantive tests to be performed. They are not designed to discover significant deficiencies in internal control.
Choice 'b' is incorrect. Searching for significant deficiencies in internal control is not part of an audit, and it would be inappropriate for the auditor to state that no significant deficiencies in internal control were noted (even if management requested such a statement).
Choice 'c' is incorrect. Searching for significant deficiencies in internal control is not part of an audit even if the auditor expects that controls are operating effectively (i.e., expects to rely on controls).
