CHAPTER 18

REPORTS ON AUDITED FINANCIAL STATEMENTS

AND SPECIAL REPORTING ISSUES
Answers to Review Questions
18-1 An auditor is associated with financial statements when he or she has consented to
the use of his or her name in a document such as an annual report.
18-2 Accounting changes can be categorized into changes that affect consistency and
those that do not affect consistency. If the change in accounting principle or in the
method of its application has a material effect on the comparability and consistency of the
financial statements and the auditor concurs with the change, the auditor should refer to
the change in an explanatory paragraph. Accounting changes that affect comparability
but do not affect consistency are normally disclosed in the footnotes to the financial
statements but do not require recognition in the auditor's report.
18-3 An example of a client-imposed scope limitation is where a client requests that
the auditor not confirm accounts receivable because of concerns about creating conflicts
with customers over amounts owed. An example of a circumstances-imposed scope
limitation is when the auditor is not engaged to conduct the audit until after year-end.
Under such circumstances, the auditor may not be able to observe inventory.
Auditors should be particularly cautious when a client places a limit on the scope of the
engagement because the client may be trying to prevent the auditor from discovering
material misstatements. Auditing standards suggest that when restrictions imposed by the
client significantly limit the scope of the engagement, the auditor should disclaim an
opinion on the financial statements.
18-4 The concept of materiality plays a major role in the auditor's choice of audit
reports. If the condition (e.g., scope limitation or not GAAP) that might lead to the
departure is judged by the auditor to be immaterial, then a standard unqualified audit
report can be issued. As the materiality of the condition increases, the auditor must judge
the effect of the item on the overall financial statements. If the condition is material but
the overall financial statements still present fairly, the auditor should issue a qualified
opinion. If the effect of the condition is so significant that the overall financial
statements are affected, the auditor should issue a disclaimer, an adverse opinion, or
consider withdrawing from the engagement.

18-5 the auditor should issue an unqualified report on the 2002 financial statements and
a qualified report on the 2003 financial statements because the current year is not in
conformity with GAAP. The non-GAAP accounting for the lease transaction should be
disclosed in the footnotes.
18-6 The auditor has no responsibility beyond the financial information contained in
the report, and he or she has no obligation to perform any audit procedures to corroborate
the other information. However, auditing standards (AU 550) requires that the auditor
read the other information and consider whether such information is consistent with the
information contained in the audited financial statements.
18-7 If the auditor determines that other information contained in audited financial
statements is incorrect, the auditor should request that the client correct the other
information. If the other information is not revised, the auditor should include an
explanatory paragraph in the audit report, withhold the report, or withdraw from the
engagement.
18-8 Examples of special reports include:
Financial statements prepared on a comprehensive basis of accounting other than
GAAP.
Specified elements, accounts, or items of a financial statement.
Compliance with aspects of contractual agreements or regulatory requirements related
to audited financial statements.
Financial presentations to comply with contractual agreements or regulatory
provisions.
Financial information presented in prescribed forms or schedules that require a
prescribed form of auditor's report.
18-9 Four bases for OCBOA financial statements are:
Regulatory basis.
Tax basis.
Cash (or modified cash) basis.
A definite set of criteria having substantial support.
It is important that OCBOA financial statements be properly titled so that they are
not confused with financial statements prepared on a GAAP basis.
18-10 When an auditor reports on an entity's compliance with certain contractual
agreements or regulatory requirements related to audited financial statements (e.g.,
covenants on loan agreements), the auditor provides negative assurance as to compliance
with the provisions of the loan agreement. Negative assurance consists of a statement
that, as a result of specified procedures, nothing came to the auditor's attention that
indicated that the provisions of the loan agreement were not complied with.

Answers to Multiple-Choice Questions

18-11
18-12
18-13
18-14
18-15
18-16

B
C
A
B
A
C

18-17
18-18
18-19
18-20
18-21
18-22

C
B
B
B
C
C