A scope limitation sufficient to preclude an unmodified opinion always will result when management

If a client will not permit inquiry of outside legal counsel, the auditor’s report ordinarily will contain a(n)
Adverse opinion.
Disclaimer of opinion.
Unmodified opinion with a separate explanatory paragraph.
Unmodified (unqualified) opinion.

Disclaimer of opinion.

This answer is correct because the client’s refusal is a client-imposed scope limitation, and such scope limitations ordinarily result in a disclaimer of opinion.

The auditor is unable to reach a conclusion as to the propriety of management’s representations due to management’s inadequate record retention policies. The auditor will have to consider issuing a(n)
Opinion qualified because of uncertainty.
Opinion qualified because of inadequate disclosure.
Adverse opinion or a qualified opinion.
Qualified opinion or a disclaimer of opinion.

Qualified opinion or a disclaimer of opinion.

This answer is correct because this is a scope limitation and a scope limitation will ordinarily result in either a qualified opinion or a disclaimer of opinion based on the importance of the representations.

Which of the following phrases should be included in the opinion paragraph when an auditor expresses a qualified opinion?
When read in

conjunction with Note X
With the foregoing

explanation
Yes No
No Yes
Yes Yes
No No

No No

The professional standards state that an audit report with a qualified opinion should not include either phrase in the opinion paragraph.

Tech Company has disclosed an uncertainty due to pending litigation. The auditor’s decision to issue a qualified opinion rather than an unmodified opinion with an emphasis-of-matter paragraph most likely would be determined by the
Lack of sufficient evidence.
Inability to estimate the amount of loss.
Entity’s lack of experience with such litigation.
Lack of insurance coverage for possible losses from such litigation.

Lack of sufficient evidence.

This answer is correct because the lack of sufficient evidence is a scope limitation that may result in a qualified opinion.

A limitation on the scope of the auditor’s examination sufficient to preclude an unmodified opinion will always result when management
Engages an auditor after the year-end physical inventory count.
Refuses to furnish a representation letter.
Knows that direct confirmation of accounts receivable with debtors is not feasible.
Engages an auditor to examine only the balance sheet.

Refuses to furnish a representation letter.

This answer is correct because when management refuses to furnish a representation letter, the scope of the auditor’s examination has been limited sufficiently to preclude an unmodified opinion.

For a nonpublic company client, when qualifying an opinion because of an insufficiency of audit evidence, an auditor should refer to the situation in the
Basis for qualification paragraph
Notes to the financial statements
Yes Yes
Yes No
No Yes
No No

Yes No

This answer is correct because the basis for qualification paragraph should refer to the limitation, and because the notes to the financial statements do not describe a scope limitation (or other matters related to details of the audit).

In which of the following circumstances would an auditor not express an unmodified opinion?
There has been a material change between periods in accounting principles.
Quarterly financial data required by the SEC has been omitted.
The auditor wishes to emphasize an unusually important subsequent event.
The auditor is unable to obtain audited financial statements of a consolidated investee.

The auditor is unable to obtain audited financial statements of a consolidated investee.

An inability to obtain the audited financial statements of a consolidated investee represents a scope limitation, and a significant scope limitation results in either a qualified opinion or a disclaimer of opinion.

An auditor may not issue a qualified opinion when
An accounting principle at variance with GAAP is used.
The auditor lacks independence with respect to the audited entity.
A scope limitation prevents the auditor from completing an important audit procedure.
The auditor's report refers to the work of a specialist.

The auditor lacks independence with respect to the audited entity.

The auditor who lacks independence must disclaim an opinion, not qualify an opinion.

Which of the following will not result in modification of the auditor’s report due to a scope limitation?
Restrictions imposed by the client.
Reliance placed on the report of another auditor.
Inability to obtain sufficient appropriate audit evidence.
Inadequacy in the accounting records.

Reliance placed on the report of another auditor.

This answer is correct because reliance on the report of another auditor does not constitute a qualification of the auditor’s opinion.

Under which of the following circumstances would an auditor’s expression of an unmodified opinion be inappropriate?
The auditor is unable to obtain the audited financial statements of a significant subsidiary.
The financial statements are prepared on the entity’s income tax basis.
There are significant deficiencies in the design and operation of the entity’s internal control.
Analytical procedures indicate that many year-end account balances are not comparable with the prior year’s balances.

The auditor is unable to obtain the audited financial statements of a significant subsidiary.

This answer is correct because either a qualified opinion or a disclaimer of opinion due to a scope limitation is appropriate when the auditor is unable to obtain the audited financial statements of a significant subsidiary.

An auditor was unable to obtain audited financial statements or other evidence supporting an entity's investment in a foreign subsidiary.

Between which of the following opinions should the entity's auditor choose?

Adverse and unmodified, with an emphasis-of-matter paragraph added.
Disclaimer and unmodified with an emphasis-of-matter paragraph added.
Qualified and adverse.
Qualified and disclaimer.

Qualified and disclaimer.

You Answered Correctly!
The auditor's inability to obtain audited financial statements or other evidence supporting an entity's investment in a foreign subsidiary represents a scope limitation. Either a qualified opinion or a disclaimer would be issued.

When qualifying an opinion because of an insufficiency of audit evidence, an auditor should modify the situation in the
Auditor's Responsibility section
Notes to the financial statements
Yes Yes
Yes No
No Yes
No No

Yes No

The last sentence in the Auditor's Responsibility section would be modified to state, "We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified audit opinion." A qualified opinion resulting from a scope limitation (an insufficiency of audit evidence) also results in the addition of a separate paragraph (Basis for Qualified Opinion, which describes the circumstances involved) and a modified opinion paragraph. No mention would be made in the notes to the financial statements.

Under which of the following circumstances would an auditor's expression of an unmodified opinion be inappropriate?
The auditor is unable to obtain the audited financial statements of a significant subsidiary.
The financial statements are prepared on the entity's income tax basis.
There are significant deficiencies in the design and operation of the entity's internal control.
Analytical procedures indicate that many year-end account balances are not comparable with the prior year's balances.

The auditor is unable to obtain the audited financial statements of a significant subsidiary.

If the auditor is unable to obtain the audited financial statements of a significant subsidiary, the auditor has a scope limitation. As a result, a qualified or disclaimer opinion would be expressed (and an unmodified opinion would be inappropriate).

In which of the following circumstances would an auditor usually choose between issuing a qualified opinion or a disclaimer of opinion?
Departure from generally accepted accounting principles.
Inadequate disclosure of accounting policies.
Inability to obtain sufficient appropriate evidential matter.
Unreasonable justification for a change in accounting principles.

Inability to obtain sufficient appropriate evidential matter.

The choice between a qualified opinion and a disclaimer of opinion arises when a scope limitation has occurred. Inability to obtain sufficient appropriate evidential matter represents a scope limitation.

Depending on the severity of the limitation, either a qualified opinion or a disclaimer would be issued.

Tech Company has disclosed an uncertainty due to pending litigation. The auditor's decision to issue a qualified opinion rather than an unmodified opinion with an emphasis-of-matter paragraph most likely would be determined by the
Lack of sufficient evidence.
Inability to estimate the amount of loss.
Entity's lack of experience with such litigation.
Lack of insurance coverage for possible losses from such litigation.

Lack of sufficient evidence.

A qualified opinion is rendered when a GAAP departure or a scope limitation exists. The lack of sufficient evidence represents a scope limitation, which could result in a qualified opinion.

An auditor most likely would modify the audit report if the entity's financial statements include a footnote on related party transactions
Disclosing loans to related parties at interest rates significantly below prevailing market rates.
Describing an exchange of real estate for similar property in a non-monetary related party transaction.
Stating that a particular related party transaction occurred on terms equivalent to those that would have prevailed in an arm's-length transaction.
Presenting the dollar volume of related party transactions and the effects of any change in the method of establishing terms from prior periods.

Stating that a particular related party transaction occurred on terms equivalent to those that would have prevailed in an arm's-length transaction.

In general, it is not possible to determine whether or not such transactions were conducted on terms equivalent to those in an arm's-length transaction. If the entity's financial statements include a footnote on related party transactions that states that a particular related party transaction occurred on terms equivalent to those that would have prevailed in an arm's-length transaction, should obtain sufficient appropriate evidence to verify arm's-length equivalence (which is unlikely in view of the rather hypothetical nature of that statement).

If such evidence were not available, the auditor would ask management to remove the unsupportable statement. If the entity refused to remove the footnote in question, the auditor would consider issuing a qualified or adverse opinion, due to GAAP departure.