Paragraph Rapid Fire

Question 1

An auditor discovers that the financial statements are prepared using a special purpose framework rather than GAAP of a nonissuer. The auditor’s opinion is unmodified, and the financial statements adequately disclose this fact. What type of paragraph or report modification is required?

Answer 1

Emphasis-of-Matter paragraph

Explanation:
When financial statements are prepared using a special purpose framework, the auditor must include an emphasis-of-matter paragraph to highlight this fact. This paragraph draws users’ attention to the basis of accounting used, which is already disclosed in the financial statements, without modifying the opinion.

Question 2

Prior to the audit report date, the auditor identifies a material inconsistency in other information included in the document containing the audited financial statements of a nonissuer. Management refuses to revise the other information. What type of paragraph or report modification is required?

Answer 2

Other-Matter paragraph

Explanation:
When the auditor finds a material inconsistency in other information (outside the financial statements) that management refuses to correct, an other-matter paragraph is added to the auditor’s report. This paragraph alerts users to the inconsistency and explains the auditor’s position, without modifying the audit opinion.

Question 3

The auditor’s report includes an alert restricting the use of the audit report of a nonissuer to specified parties only. What type of paragraph or report modification is required?

Answer 3

Other-Matter paragraph

Explanation:
When the auditor restricts the use of the audit report (for example, for special purpose financial statements or contractual/regulatory basis reports not intended for general use), an other-matter paragraph is required. This paragraph explains the restriction and is separate from the opinion paragraph.

Question 4

The auditor is engaged to report on supplementary information presented with the financial statements of a nonissuer but chooses to include the report on this supplementary information within the auditor’s report rather than issuing a separate report. What type of paragraph or report modification is required?v

Answer 4

Separate section of the auditor’s report

Explanation:
When the auditor reports on supplementary information within the auditor’s report (instead of a separate report), a separate section titled “Supplementary Information” (or similar) is required. This section clearly distinguishes the auditor’s responsibilities and findings related to the supplementary information from the opinion on the financial statements.

Question 5

The auditor is engaged to report on supplementary information that accompanies the financial statements of a nonissuer. The auditor decides to issue a separate report on this supplementary information rather than including it in the auditor’s report on the financial statements. What type of paragraph or report modification is required?

Answer 5

Separate report altogether

Explanation:
When the auditor chooses to report on supplementary information in a separate report, no additional paragraph is added to the auditor’s report on the financial statements. Instead, the auditor issues a distinct report specifically addressing the supplementary information, clearly separating it from the audit opinion on the financial statements.

Question 6

The auditor is auditing financial statements of a nonissuer prepared under a contractual basis of accounting that restricts the use of the audit report to specified parties. What type of paragraph or report modification is required?

Answer 6

Other-Matter paragraph

Explanation:
When financial statements are prepared using a special purpose framework such as a contractual basis and the auditor restricts the use of the audit report, an other-matter paragraph is required. This paragraph explains the restriction on the use of the report and is separate from the opinion paragraph.

Question 7

During the audit, the auditor identifies substantial doubt about the nonissuer entity’s ability to continue as a going concern. Management’s plans do not alleviate this doubt. What type of paragraph or report modification is required?

Answer 7

Separate section of the auditor’s report

Explanation:
When there is substantial doubt about going concern and management’s plans do not alleviate it, the auditor must include a separate section (often titled “Substantial Doubt About Going Concern”) in the auditor’s report. This section follows the opinion paragraph and clearly describes the going concern issue. It is not an emphasis-of-matter or other-matter paragraph.

Question 8

The financial statements are prepared under a special purpose framework for a nonissuer, and the auditor issues an unmodified opinion. What type of paragraph or report modification is required?

Answer 8

Emphasis-of-Matter paragraph

Explanation:
When financial statements are prepared using a special purpose framework, the auditor must include an emphasis-of-matter paragraph to highlight this fact. This paragraph draws attention to the basis of accounting used, which is adequately disclosed in the financial statements, without modifying the opinion.

Question 9

The auditor is auditing financial statements prepared under a regulatory basis of accounting that restricts the use of the audit report to specified parties for a nonissuer. What type of paragraph or report modification is required?

Answer 9

Other-Matter paragraph

Explanation:
When financial statements are prepared under a regulatory or contractual basis of accounting and the auditor restricts the use of the audit report to specified parties, an other-matter paragraph is required. This paragraph explains the restriction and is separate from the opinion paragraph.

Question 10

The auditor is auditing financial statements prepared under U.S. GAAP and IFRS for the same nonissuer , issuing one auditor’s report covering both sets of financial statements. What type of paragraph or report modification is appropriate?

Answer 10

Other-Matter paragraph

Explanation:
When the auditor is engaged to report on more than one set of financial statements prepared under different general-purpose frameworks (e.g., U.S. GAAP and IFRS), an other-matter paragraph may be included. This paragraph explains the auditor’s engagement and clarifies the frameworks used, since this matter relates to the audit engagement rather than disclosures within a single set of financial statements.

Question 11

The nonissuer changes its method of accounting for inventory from FIFO to weighted average, and the change is justified, properly accounted for, and adequately disclosed. What type of paragraph or report modification is required?

Answer 11

Emphasis-of-Matter paragraph

Explanation:
A justified change in accounting principle with a material effect on the financial statements requires an emphasis-of-matter paragraph. This paragraph highlights the change and refers users to the related disclosures. The auditor’s opinion remains unmodified.

Question 12

The auditor finds that the financial statements of a nonissuer include a material misstatement in previously issued financial statements that has now been corrected. The correction is properly accounted for and disclosed. What type of paragraph or report modification is required?

Answer 12

Emphasis-of-Matter paragraph

Explanation:
Correction of a material misstatement in previously issued financial statements requires an emphasis-of-matter paragraph to draw attention to the correction and related disclosures. The opinion is not modified.

Question 13

The auditor identifies a material inconsistency in other information included in the document containing the audited financial statements. Management refuses to revise the other information. What type of paragraph or report modification is required?

Answer 13

Explanatory paragraph (issuer) or Other-Matter paragraph (nonissuer)

Explanation:
When there is a material inconsistency in other information that management refuses to correct, the auditor must include an explanatory paragraph (issuer) or other-matter paragraph (nonissuer) describing the inconsistency and its effect on the audit report.

Question 14

The auditor audits financial statements prepared in accordance with U.S. GAAP, with no significant issues or disclosures requiring emphasis. The audit is complete, and all disclosures are adequate. What type of paragraph or report modification is required?

Answer 14

None

Explanation:
When the financial statements are prepared under the applicable framework with no significant issues or disclosures requiring emphasis, no additional paragraphs or modifications are needed. The auditor issues an unmodified opinion with a standard report.

Question 15

A nonissuer’s financial statements are prepared in accordance with U.S. GAAP, the audit is complete, and there are no significant uncertainties, changes in accounting principles, or other matters requiring emphasis. What type of paragraph or report modification is required?

Answer 15

None

Explanation:
When a nonissuer’s financial statements are prepared under the applicable framework with no significant issues or disclosures requiring emphasis, no additional paragraphs or modifications are needed. The auditor issues a standard unmodified report.

Question 16

An issuer’s financial statements are audited under U.S. GAAP with no material uncertainties, no changes in accounting principles, and no other matters requiring disclosure. What type of paragraph or report modification is required?

Answer 16

None

Explanation:
For an issuer with a clean audit and no significant matters to highlight, the auditor issues a standard unqualified report without any explanatory or emphasis-of-matter paragraphs.

Question 17

A nonissuer’s audit reveals no material inconsistencies in other information, no going concern issues, and no changes in accounting principles. The audit is complete and disclosures are adequate. What type of paragraph or report modification is required?

Answer 17

None

Explanation:
If there are no matters requiring emphasis or explanation, the auditor’s report remains unmodified with no additional paragraphs.

Question 18

An issuer’s audit finds no material misstatements, no going concern doubts, and no restrictions on the use of the audit report. The financial statements comply fully with the applicable framework. What type of paragraph or report modification is required?

Answer 18

None

Explanation:
When the audit is clean and no special circumstances exist, the auditor issues a standard unqualified report without additional paragraphs.

Question 19

A nonissuer’s financial statements disclose a significant related party transaction that is properly accounted for and disclosed. The auditor’s opinion is unmodified. What type of paragraph or report modification is appropriate?

Answer 19

Emphasis-of-Matter paragraph

Explanation:
For a nonissuer, when there is a significant related party transaction properly disclosed in the financial statements, the auditor may include an emphasis-of-matter paragraph to draw attention to this matter. This paragraph highlights the disclosure without modifying the opinion.

Question 20

A nonissuer’s financial statements include a justified change in accounting principle that is properly accounted for and adequately disclosed. The auditor issues an unmodified opinion. What type of paragraph or report modification is required?

Answer 20

Emphasis-of-Matter paragraph

Explanation:
When there is a justified change in accounting principle with a material effect on the financial statements, the auditor is required to include an emphasis-of-matter paragraph. This paragraph draws attention to the change and refers users to the related disclosures, without modifying the opinion.

Question 21

During the audit of an issuer, the auditor identifies the evaluation of the company’s self-insurance liabilities as involving especially challenging, subjective, or complex auditor judgment. This matter was communicated to the audit committee. What section of the auditor’s report must address this?

Answer 21

Critical Audit Matters (CAM) section

Explanation:
For issuers, any matter arising from the audit that involves especially challenging or complex auditor judgment and is communicated to the audit committee must be disclosed in the CAM section of the auditor’s report. This section describes the CAM, principal considerations, how it was addressed, and references related disclosures. CAMs provide transparency but do not modify the audit opinion.

Question 22

An issuer’s auditor completes the audit and determines that there are no critical audit matters to communicate. How should this be reflected in the auditor’s report?

Answer 22

Include a CAM section stating no critical audit matters were identified

Explanation:
Even if no CAMs are identified, the auditor’s report for an issuer must include a CAM section stating that no critical audit matters were determined. This ensures transparency and confirms the auditor considered CAMs. The section is required and cannot be omitted.

Question 23

A nonissuer’s financial statements include a material misstatement in previously issued financial statements that has now been corrected and properly disclosed. The auditor issues an unmodified opinion. What type of paragraph or report modification is required?

Answer 23

Emphasis-of-Matter paragraph

Explanation:
When a material misstatement in prior financial statements is corrected and adequately disclosed, the auditor includes an emphasis-of-matter paragraph to highlight the correction. This paragraph draws attention to the change without modifying the opinion.

Question 24

An auditor is unable to obtain sufficient appropriate audit evidence due to a management-imposed scope limitation, but the possible effects of undetected misstatements could be material and pervasive. The auditor is unable to withdraw from the engagement. What type of paragraph or report modification is required?

Answer 24

Other-Matter paragraph

Explanation:
When the auditor cannot withdraw despite a significant scope limitation, an other-matter paragraph is added to explain the situation and its potential effects. This paragraph informs users about the limitation without modifying the opinion if the auditor can still express one.

Question 25

An issuer’s financial statements are prepared under a special purpose framework, and the auditor issues an unqualified opinion. What type of paragraph or report modification is required?

Answer 25

Explanatory paragraph Explanation: For issuers, when financial statements are prepared using a special purpose framework, an explanatory paragraph is required to highlight this fact. This paragraph follows the opinion and draws attention to the basis of accounting used, without modifying the opinion.

Question 26

An auditor decides to present their report on supplementary information in the auditor's report on the fairness of the financial statements.

Answer 26

Report in a separate section When the auditor chooses to report on supplementary information presented with the financial statements, the report should be included in a separate section.

Question 27

The client appropriately changed from accounting for their marketable securities using the equity method in Year 4 to the cost method in Year 5. The effect has a material effect on the financial statements, but is adequately accounted for and disclosed.

Answer 27

Emphasis-of-Matter A material justified change in accounting principle should be described in an emphasis-of-matter paragraph.

Question 28

The financial statements are prepared in accordance with the cash basis, which is a special purpose framework.

Answer 28

Emphasis-of-Matter When the financial statement are prepared in accordance with an applicable special purpose framework, such as the cash basis, the auditor should include an emphasis-of-matter paragraph.

Question 29

The financial statements of the prior period were audited by a predecessor auditor and the predecessor's audit report is not presented.

Answer 29

Other-Matter If the financial statements of the prior period were audited by a predecessor auditor and the predecessor's audit report is not presented, then the auditor should add an other-matter paragraph.

Question 30

The client decides in Year 5 to change the depreciable life of equipment from 8 years to 5 years.

Answer 30

None A change in estimate, such as a change in useful life, is not required to be mentioned in the audit report.

Question 31

The auditor concludes that there is substantial doubt about the client's ability to continue as a going concern for a reasonable period of time. Substantial doubt has been alleviated.

Answer 31

None When an auditor concludes there is substantial doubt about the entity's ability to continue as a going concern, and substantial doubt has been alleviated, the auditor is not required to add an additional paragraph to an unmodified opinion.

Question 32

The auditor includes an alert in the audit report that restricts the use of the auditor's report.

Answer 32

Other-Matter An other-matter paragraph is used when the auditor includes an alert that the audit report is restricted use.

Question 33

The client is engaged in litigation that is adequately accrued for and disclosed in the financial statements.

Answer 33

None Litigation that is appropriately accounted for and disclosed in the financial statements does not require an additional paragraph. However, if this question indicated that the litigation was "unusually important" that an emphasis-of-matter paragraph may have been utilized.