CHAPTER25

MODIFICATIONSTOTHE
INDEPENDENTAUDITORSREPORT
Questions
1.

Major reasons for departure from the standard unqualified report

1.
2.
3.
4.
5.
6.
7.
8.

2.

Students may identify more than one description of the most important
distinction between an opinion and a disclaimer. All the following are valid,
although (a) is intended to be the Most Important:
a.
b.
c.
d.

3.

Disagreement with management regarding the acceptability of the

accounting policies selected, the method of their application or the
adequacy of financial statement disclosure.
Limitation on scope of the audit (resulting in a lack of evidence).
Using extra paragraph(s) to emphasize significant matters.
Different opinion on prior year comparative statements.
Relying on the work and reports of other independent auditors.
Required supplementary data omitted or departs from guidelines.
Other information inconsistent with financial statements or contains
material misstatement of fact.
Auditor is not independent.

An opinion (unqualified, qualified or adverse) is an explicit statement of the

auditors conclusion(s), while a disclaimer is an (empty) assertion of no
conclusion.
An (unqualified) opinion is the highest level of assurance, while a
disclaimer is the lowest level (no assurance).
An opinion requires evidence as a basis, while a disclaimer results from
lack of evidence.
Auditors must be independent to give an opinion, while a disclaimer can
result from a CPAs lack of independence.

A material scope restriction occurs when the auditor is unable to gather

sufficient competent evidence to support an unqualified opinion on the financial
statements. Scope restrictions may be client-imposed or they may result from
other circumstances, e.g., appointment of the auditor after the clients physical
inventory has been taken. A material scope restriction need not result in a
modification of the auditors opinion provided the auditor can obtain satisfaction
by alternate means.

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Solutions Manual Public Accountancy Profession

4.

The principal auditors reference in his report to another auditor is not a

qualification in scope. The reference only shows the divided responsibility for
the audit work.

5.

When an auditor is not independent with respect to a client, a disclaimer of

opinion must be rendered. The disclaimer must be issued because the
statements cannot be audited in accordance with auditing standards. (An
accountant, not an auditor, is the person associated with compiled and reviewed
financial statements. An accountant can give a compilation disclaimer
report on compiled unaudited financial statements).

6.

The auditor may decide to disclaim an opinion when confronted by a material

scope limitation that precludes gathering sufficient evidence to support an
opinion as to overall fairness of financial presentation. The auditor may also
disclaim an opinion if his/her name is associated with financial statements for
which an audit was not intended (e.g., compilations and reviews), or if the
auditor is not independent.

7.

The audit opinion does not extend to the other information, and therefore, the
opinion is not affected by omission or inconsistency or incorrect supplemental
information.

8.

Upon learning of a change in accounting principle, the auditor should first

determine the materiality and appropriateness of the change. If material and the
auditor agree with the clients justification for the change, an explanatory
paragraph should be added following the opinion paragraph. The paragraph will
refer to the footnote describing the change. If the change is not properly
accounted for or is inadequately disclosed, the auditor should consider issuing a
qualified or adverse opinion.

Multiple Choice Questions

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

C
D
C
D
A
B
C
C
C
A

11.
12.
13.
14.
15.
16.
17.
18.
19.
20.

D
C
A
A
C
C
B
B
C
B

21.
22.
23.
24.
25.
26.

C
D
D
A
D
B

Modifications to the Independent Auditors Report

25-3

Cases
1.
Independent Auditors Report
To the shareholders and board of directors of Various Fabrics, Inc.:
We have audited the accompanying statement of financial positions of
Various Fabrics, Inc. as of January 31, 2013 and 2012 and the related
statements of income, retained earnings, and cash flows for the years
then ended. These financial statements are the responsibility of the
companys management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards.
Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Various Fabrics,
Inc. as of January 31, 2013 and 2012 and the results of its operations
and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
Aya de Jesus, CPA
March 2, 2013
2.

1.
2.
3.
4.

F, L
B, I
B, Q
A, J

3.

A.
B.
C.
D.
E.

1,
2,
4.
1.
6.

7c.
7a.

5.
6.
7.

B, I
B, I
E, J

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F. 5.
G. 2
H.
I.
J.
K.
L.
M.

3,
2,
3,
6.
1,
1,

(Note: The change in principle should be described in the descriptive

paragraph following the scope paragraph.)
7c.
7b.
7d.
(given the materiality of property, plant, and equipment)
7e.
7b and 7e.

Modifications to the Independent Auditors Report

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