AAA1- Chapter 7

Which of the following must be included in an auditor’s report

• A statement that the auditor believes the audit evidence obtained is sufficient and appropriate

• Title indicating the report is that of the independent auditor

• Description of the meaning of materiality

• A statement that the auditor is independent of the entity and has fulfilled their ethical responsibilities

According to ISA 701, which of the following should be included in the ‘Key Audit Matters’ paragraph in the auditor’s report

• Matters which required significant auditor attention

• Matters which result in a modification to the audit opinion

• All matters which were communicated to those charged with governance

• All matters which are considered to be material to the financial statements

Events after the reporting date are categorised as either being an adjusting event and a non-adjusting event . An adjusting event provides evidence of conditions that existed at the reporting date. Which of the following should be classified as adjusting event

• Bankruptcy of a major customer

• Major purchases of assets

• Commencing a court case arising out of events after the reporting period

• Announcing a plan to discontinue an operation

Events after the reporting date are categorised as either being an adjusting event and a non-adjusting event. Non-adjusting events are not incorporated into the financial statements, although they may be disclosed. Which of the following should be classified as a non-adjusting event?

• A fire destroying some of the company's inventory (the company's going concern status is not affected)

• Sale of inventory held at the end of the reporting period for less than cost

• Discovery of fraud or error affecting the financial statement

• The insolvency of a customer with a debt owing at the end of the reporting period which is still outstanding

ISA 700 Forming an opinion and reporting on financial statements sets out the basic elements of an auditor's report. Which of the following is not included in an unmodified auditor's report?

• Management's responsibility for the financial statements

• Auditors' responsibilities

• Audit opinion

• Deficiencies of internal controls

ISA 705 Modification to the opinion in the independent auditor's report identifies three possible types of modification. In which of the following circumstances would a disclaimer of opinion be issued

• The auditor concludes that the financial statements include misstatements which are material but not pervasive to the financial statements.

• The auditor concludes that the financial statements include misstatements which are both material and pervasive to the financial statements.  

• The auditor has not been able to obtain sufficient appropriate audit evidence on which to base an opinion but has concluded that the possible effects of any undetected misstatements could be material but not pervasive

• The auditor has not been able to obtain sufficient appropriate audit evidence on which to base an opinion and has concluded that the possible effects of any undetected misstatements could be both material and pervasive.

The statement of financial position of R Co includes a material amount of $200,000 in respect of costs capitalised in the year as development expenditure. The auditor has concluded that these costs are research expenditure.  If the auditor is to issue an unmodified opinion which financial statements will require adjustment?

• Statement of financial position only

• Statement of profit or loss only

• Statement of financial position and statement of profit or loss

• Neither the statement of financial position nor the statement of profit or loss

The fiscal year of Green Ltd is 30 June 20X9. Your audit firm was appointed as auditor of Green Ltd on 15 July 20X9, therefore auditor did not attend the inventory count which was carried out on 30 June 20X9. No alternative audit procedures could be performed in this case. The inventory balance of Green at reporting date 30 June 20X9 is $250,000. The draft financial statements show a profit before tax of $1.7 million. Which of the following is the most appropriate form of audit opinion that auditor should issue if the issue remains unresolved?

• An Adverse opinion and an explanation of circumstances in the “Basis for adverse opinion” section

• A qualified opinion and the reason for the modification should be outlined in the paragraph “Basis for qualified opinion”

• An unmodified opinion with an “Emphasis of matter paragraph”

• An unmodified opinion

The directors have now agreed to include going concern disclosures, while continuing to use the going concern basis of accounting.  You agree with the client's management that the going concern basis of accounting is appropriate under the circumstances. You have reviewed the draft disclosures and believe they are correct and adequate. Indicate which form of audit opinion would be appropriate and how the going concern issue would be disclosed in the auditor's report

• An unmodified opinion and describe the nature of the going concern uncertainty in the “Material Uncertainty Related to Going Concern” section

• An unmodified opinion and describe the nature of the going concern uncertainty in the “Key Audit Matters” section

• An adverse opinion and describe the nature of the going concern uncertainty in the “Basis for Adverse Opinion” section

• A qualified opinion describe the nature of the going concern uncertainty in the “Basis for qualified Opinion” section

Maison's computerised wages program is backed up daily, however for a period of two months the wages records and back-ups have been corrupted, and therefore cannot be accessed. Wages and salaries for these two months are $1.1m. Profit before tax is $10m. Based on the above information Which of the following correctly summarises the effect of the issue relating to the wages balance in the financial statements of Maison

• Material misstatement related to “proper accounting records have not been kept

• Material misstatement related to “Liabilities to tax authorities may be understated

• Material misstatement related to “Profit may be overstated

• Immaterial misstatement related to wages and salaries