ACCA AA · Chapter 13
Misstatements and the auditor's report MCQs with Answers
12 multiple-choice questions on Misstatements and the auditor's report for ACCA AA Audit and Assurance. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
The following uncorrected misstatements have been identified in the draft financial statements of Lissom Co: 1. Closing inventory overstated by $45,000 2. Accruals understated by $30,000 3. Revenue of $25,000 recorded for goods dispatched after the year end (the goods were correctly included in closing inventory and no cost of sales was recorded) 4. Depreciation overstated by $20,000 What is the net effect of these misstatements on reported profit?
- A) Profit overstated by $40,000
- B) Profit overstated by $80,000
- C) Profit overstated by $100,000
- D) Profit overstated by $120,000
Show answer & explanation
Answer: B) Profit overstated by $80,000
Overstated inventory overstates profit by $45,000 (cost of sales too low), understated accruals overstate profit by $30,000 (expenses too low) and revenue recorded too early overstates profit by $25,000 (as the goods remain in inventory, no cost of sales offsets it), a total of $100,000. Overstated depreciation understates profit by $20,000. Net effect = $45,000 + $30,000 + $25,000 - $20,000 = $80,000 overstatement. Adding all four gives $120,000, ignoring the opposite direction of the depreciation error.
Question 2
Under ISA 450, what should the auditor do with misstatements identified during the audit, other than those that are clearly trivial?
- A) Report them directly to the shareholders
- B) Ignore them if they are individually below performance materiality
- C) Correct them in the client's records personally
- D) Accumulate them and request management to correct them
Show answer & explanation
Answer: D) Accumulate them and request management to correct them
ISA 450 requires the auditor to accumulate all misstatements other than those that are clearly trivial and to communicate them on a timely basis to management, requesting correction. Individually small misstatements may be material in aggregate. The auditor does not make adjustments to the client's records, as that would be a management responsibility.
Question 3
Draft financial statements of Tumbril Co show profit before tax of $2.0 million and total assets of $15 million. Inventory is overstated by $500,000 and management refuses to adjust. The auditor concludes the misstatement is material but not pervasive. What opinion should be given?
- A) Qualified opinion
- B) Disclaimer of opinion
- C) Adverse opinion
- D) Unmodified opinion with an Emphasis of Matter paragraph
Show answer & explanation
Answer: A) Qualified opinion
The misstatement is 25% of profit before tax ($500,000 / $2.0m) and 3.3% of total assets, so it is material. As it is confined to inventory and does not affect the financial statements as a whole, it is not pervasive. Under ISA 705 a material but not pervasive misstatement leads to a qualified 'except for' opinion.
Question 4
Under ISA 705, what type of opinion is required when the auditor concludes that misstatements are both material and pervasive?
- A) Adverse opinion
- B) Unmodified opinion with an Other Matter paragraph
- C) Qualified opinion
- D) Disclaimer of opinion
Show answer & explanation
Answer: A) Adverse opinion
An adverse opinion states that the financial statements do not give a true and fair view, and is required when misstatements are material and pervasive. A qualified opinion is for material but not pervasive matters, and a disclaimer relates to an inability to obtain sufficient appropriate evidence.
Question 5
The auditor is unable to attend the inventory count and cannot obtain sufficient appropriate evidence about inventory by alternative means. Inventory is material but the effect is not pervasive. What opinion should be given?
- A) Disclaimer of opinion
- B) Adverse opinion
- C) Qualified opinion
- D) Unmodified opinion
Show answer & explanation
Answer: C) Qualified opinion
An inability to obtain sufficient appropriate evidence, where the possible effects are material but not pervasive, results in a qualified opinion. The auditor states that, except for the possible effects of the matter, the financial statements give a true and fair view. A disclaimer is only used if the possible effects are pervasive.
Question 6
Under ISA 705, which of the following would NOT make the effects of a misstatement pervasive?
- A) The misstatement relates to a disclosure that is fundamental to users' understanding of the financial statements
- B) The misstatement affects many elements of the financial statements
- C) The misstatement is confined to one element, but that element represents a substantial proportion of the financial statements
- D) The misstatement is confined to a single account balance that is not a substantial proportion of the financial statements
Show answer & explanation
Answer: D) The misstatement is confined to a single account balance that is not a substantial proportion of the financial statements
ISA 705 defines pervasive effects as those not confined to specific elements, or if confined, representing a substantial proportion of the financial statements, or relating to disclosures fundamental to users' understanding. A misstatement in one account that is not a substantial proportion is material at most, not pervasive.
Question 7
Which situation would lead the auditor to disclaim an opinion under ISA 705?
- A) The auditor wishes to draw attention to a significant subsequent event that is disclosed
- B) The financial statements contain a material uncertainty related to going concern that is adequately disclosed
- C) The auditor is unable to obtain sufficient appropriate evidence and the possible effects of undetected misstatements could be both material and pervasive
- D) The financial statements contain a material misstatement that management refuses to correct
Show answer & explanation
Answer: C) The auditor is unable to obtain sufficient appropriate evidence and the possible effects of undetected misstatements could be both material and pervasive
A disclaimer is given when the auditor cannot obtain sufficient appropriate evidence and the possible effects could be both material and pervasive. A material misstatement leads to a qualified or adverse opinion. Adequately disclosed going concern uncertainties and other disclosed matters are dealt with by additional sections or paragraphs without modifying the opinion.
Question 8
Which of the following best describes when an Emphasis of Matter paragraph is used under ISA 706?
- A) To draw attention to a matter not presented in the financial statements that is relevant to users' understanding of the audit
- B) To describe the matters of most significance in the audit of a listed entity
- C) To explain the reasons for a qualified opinion
- D) To draw attention to a matter appropriately presented or disclosed in the financial statements that is fundamental to users' understanding of them
Show answer & explanation
Answer: D) To draw attention to a matter appropriately presented or disclosed in the financial statements that is fundamental to users' understanding of them
An Emphasis of Matter paragraph refers to a matter already properly presented or disclosed that is fundamental to understanding, such as a significant uncertainty over litigation or a major catastrophe. An Other Matter paragraph deals with matters not in the financial statements. Reasons for modification go in the Basis for Opinion section, and matters of most significance are key audit matters.
Question 9
Under ISA 701, from which matters does the auditor select key audit matters?
- A) Matters communicated with those charged with governance that required significant auditor attention
- B) All significant deficiencies in internal control reported to management
- C) Matters requested by the shareholders at the annual general meeting
- D) All misstatements identified during the audit, whether corrected or not
Show answer & explanation
Answer: A) Matters communicated with those charged with governance that required significant auditor attention
Key audit matters are those of most significance in the audit of the current period, selected from matters communicated with those charged with governance that required significant auditor attention. They are required for audits of listed entities. A matter giving rise to a modified opinion is reported in the Basis for Opinion section rather than as a key audit matter.
Question 10
The auditor of Hasp Co concludes that the going concern basis is appropriate, but that a material uncertainty exists which is adequately disclosed in the financial statements. How should this be reported under ISA 570?
- A) Adverse opinion because the entity may not be a going concern
- B) Unmodified opinion with a separate section headed 'Material Uncertainty Related to Going Concern'
- C) Unmodified opinion with an Emphasis of Matter paragraph headed 'Going Concern'
- D) Qualified opinion due to the material uncertainty
Show answer & explanation
Answer: B) Unmodified opinion with a separate section headed 'Material Uncertainty Related to Going Concern'
When the going concern basis is appropriate and a material uncertainty is adequately disclosed, ISA 570 requires an unmodified opinion and a separate section headed 'Material Uncertainty Related to Going Concern', drawing attention to the disclosure. If disclosure were inadequate, a qualified or adverse opinion would be needed; an adverse opinion is required if the going concern basis is inappropriate.
Question 11
Management of Jarvey Co has prepared financial statements on a going concern basis, but the auditor concludes that the company will cease trading shortly after the year end and that the going concern basis is inappropriate. What opinion should be given?
- A) Unmodified opinion with a Material Uncertainty Related to Going Concern section
- B) Disclaimer of opinion
- C) Adverse opinion
- D) Qualified opinion
Show answer & explanation
Answer: C) Adverse opinion
If the financial statements have been prepared on a going concern basis when this is inappropriate, ISA 570 requires an adverse opinion, regardless of any disclosure. The use of the wrong basis affects the measurement of most items and so is pervasive. A disclaimer is for an inability to obtain evidence rather than a known misstatement.
Question 12
Under ISA 700, which of the following is included in the Basis for Opinion section of the auditor's report?
- A) A statement that the auditor is independent of the entity in accordance with relevant ethical requirements
- B) A description of management's responsibilities for the financial statements
- C) The key audit matters
- D) The auditor's opinion on the financial statements
Show answer & explanation
Answer: A) A statement that the auditor is independent of the entity in accordance with relevant ethical requirements
The Basis for Opinion section states that the audit was conducted in accordance with ISAs, refers to the auditor's responsibilities section, includes the statement of independence and ethical compliance, and states whether the evidence obtained is sufficient and appropriate. Management's responsibilities, key audit matters and the opinion each have their own sections.