1. What is the auditor's liability to clients under common law

2. What is the auditor's legal liability under the Securities Act of 1933 & 1934

3. What is the auditor's legal liability under the Sarbanes-Oxley Act Of 2002

Describe what ismeant when it is saidthat an auditor is "associated with"a setof financial statements.

LO-

18-2Distinguishbetween accounting changes thataffectconsistencyand changes thatdo not. To what does the word

consistency

refer? How is it possible for an accounting change to affect comparability but not consistency?

LO-,-

18-3Give examplesof a client-imposedand a condition-imposedscope limitation. Why is aclient-imposed limitation generally considered more serious?

LO-

18-4How does themateriality ofa departure from GAAP affect the auditor's choiceof financial statement audit reports?

LO-

18-5In 2017, your firm issued an unmodified reporton TosiCorporation, aprivate company. During 2018, Tosi entered its first lease transaction, which you have determined is materialbut not pervasive. Tosi Corporation's management chooses totreat the transaction as an operating lease, without adopting the requirements of the new FSB leasing standard. What types of reports would you issue on the corporation's comparative financial statements for 2017 and 2018?

LO-

18-6What are theauditor's responsibilities for other information includedin an entity annual report?

LO-

18-7If the auditor determines that other information containedwith the audited financial statements is incorrect and the client refuses to correct the other information, what actions can the auditor take?

LO-,-,-

18-8Listthreeexamplesof"specialreports."

LO-

18-9List four basesfor special purpose financial statements. Whyis itimportant thatthe audit report identifies the basis of accounting used in the preparation of the financial statements?

MULTIPLE-CHOICE QUESTIONS

All applicable questions are available with Connect.

LO 18-1, 18-2

18-10In whichof the followingsituations would an auditor ordinarily issuean unqualified/unmodified financial statement audit opinion with no explanatory (or emphasis-of-matter/other-matter)paragraph?a.Theauditorwishestoemphasizethattheentityhadsignificantrelated-party transactions.b.Theauditordecidesnottorefertothereportofanotherauditorasabasis,inpart, in the auditor's opinion.c.Theentityissuesfinancialstatementsthatpresentfinancialpositionandresultsof operations but omits the statement of cash flows.d.Theauditorhassubstantialdoubtabouttheentity'sabilitytocontinueasagoing concern, but thecircumstances are fully disclosed in the financial statements.

LO18-1,18-2

18-11A public entity changed from thestraight-linemethod 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. Theclient's financial statements containno material misstatements and the auditor concurs that this change is justified. If the change is disclosed in the notes to the financial statements, the auditor should issue a report with a(n)a."Exceptfor,"qualifiedopinion.b.Adverseopinion.c.Unqualifiedopinion.d.Consistencymodification.

620

Part6CompletingtheAuditandReportingResponsibilities

LO18-1,18-2

18-12An auditorincludes aseparate paragraph inan otherwiseunmodified financial statement audit report to emphasize that the entity being reported upon had significant transactions with related parties. The inclusion of this separate paragrapha.Isappropriateandwouldnotnegatetheunmodifiedopinion.b.Isconsideredan"exceptfor"qualificationoftheopinion.c.Violatesauditingstandardsifthisinformationisalreadydisclosedinfootnotesto the financial statements.d.Necessitatesarevisionoftheopinionparagraphtoincludethephrase"withthe foregoing explanation."

LO18-2

18-13Eagle Company, apublic company, hada computer failure and lost part of its financial data. As aresult, the auditor was unable to obtain sufficient audit evidence relating to Eagle's inventory account. Assuming theinventory accountis at leastmaterial, the auditor would most likely choose eithera.Aqualifiedopinionoradisclaimerofopinion.b.Aqualifiedopinionoranadverseopinion.c.Anunqualifiedopinionwithnoexplanatoryparagraphoranunqualifiedopinion with an explanatory paragraph.d.Aqualifiedopinionwithnoexplanatoryparagraphoraqualifiedopinionwithan explanatory paragraph.

LO18-3,18-4

18-14TechCompany has appropriately disclosedan uncertaintydue topending litigation. However, the auditor was unable tosatisfy herself that all pending litigation had been identified. The auditor's decision to issue a qualified opinion on Tech's financial statements would most likely result froma.Alackofsufficientevidence.b.Aninabilitytoestimatetheamountofloss.c.Theentity'slackofexperiencewithsuchlitigation.d.Alackofinsurancecoverageforpossiblelossesfromsuchlitigation.

LO 18-3, 18-4,18-5

18-15In whichof the following circumstanceswould anauditor usuallychoose between issuing a qualified opinion or a disclaimer of opinionon a client's financial statements?a.Departurefromgenerallyacceptedaccountingprinciples.b.Inadequatedisclosureofaccountingpolicies.c.The inabilityoftheauditortoobtainsufficientappropriateevidence.d.Unreasonablejustificationforachangeinaccountingprinciple.

LO 18-3, 18-4,18-5

18-16King, CPA, was engaged to audit the financialstatements ofChang Company, a private company after its fiscalyear had ended. King neither observed theinventory count nor confirmed the receivables by direct communication with debtors but was satisfied that both were fairly stated after applying appropriate alternative procedures. King's financial statement audit reportmost likely contained a(n)a.Qualifiedopinion.b.Disclaimerofopinion.c.Unmodifiedopinion.d.Unmodifiedopinionwithanemphasis-of-matterparagraph.

LO18-6

18-17Comparativefinancial statements fora public company include the prior year's financial statements, which were audited bya predecessor auditor. The predecessor's report is not presented along withthe comparative financial statements. If the predecessor's reportwas unqualified, the successor shoulda.Expressanopiniononthecurrentyear'sstatementsaloneandnot refer to the prior year's statements.b.Indicateintheauditor'sreportthatthepredecessorauditorexpressedanunqualified opinion.c.Obtainaletterofrepresentationsfromthepredecessorconcerninganymatters that might affect thesuccessor's opinion.d.Disclaimanopinion.

Chapter18ReportsonAuditedFinancialStatements

621

LO18-6

18-18When reportingon comparative financialstatements, which of thefollowing circumstances should ordinarily cause the auditor to change the previously issued opinion on theprior year's financial statements?a.Theprioryear'sfinancialstatementsarerestatedfollowingthepurchaseof another company in thecurrent year.b.Adeparturefromgenerallyacceptedaccountingprinciplescausedanadverse opinion on the prior year's financial statements, and that prior year statements have been properly restated.c.Achangeinaccountingprinciplecausestheauditortomakeaconsistentmodification in the currentyear's audit report.d.Ascopelimitationcausedaqualifiedopinionontheprioryear'sfinancialstatements, but thecurrent year's opinion is properly unqualified.

LO18-7

18-19Which ofthe following best describes theauditor's responsibility for "other information" included in the annual report tostockholders that contains financial statements and theauditor's report?a.Theauditorhasnoobligationtoreadthe"otherinformation."b.Theauditorhasnoobligationtocorroboratethe"otherinformation"butshould read the "other information" to determine whether it is materially consistent with the financial statements.c.Theauditorshouldextendtheexaminationtotheextentnecessarytoverifythe"otherinformation."d.Theauditormustmodifytheauditor'sreporttostatethattheotherinformation"is unaudited" or "is not covered by the auditor's report."

LO18-8

18-20When reportingon financialstatementsprepared based on accountingused for income tax purposes, the auditor should include in the report aparagraph thata.Emphasizesthatthefinancialstatementshavenotbeenexaminedby generally accepted auditing standards.b.Referstoatutorialthatexplainstheincometaxbasisofaccounting.c.Statesthattheincometaxbasisofaccountingisabasisofaccountingotherthan generally acceptedaccounting principles.d.Justifiestheuseoftheincometaxbasisofaccounting.

LO18-9

18-21When an auditoris asked toexpress anopinion on an entity'srent and royalty revenues, he or she maya.Notaccepttheengagementbecausetodosowouldbetantamounttoagreeingto issue a piecemeal opinion.b.Notaccepttheengagementunlessalsoengagedtoauditthefullfinancialstatements of the entity.c.Accepttheengagement,providedtheauditor'sopinionisexpressedinaspecial report that clearly states that only these specific accounts were audited.d.Accepttheengagement,provideddistributionoftheauditor'sreportislimitedto the entity's management