CAF-8 · Chapter 14
Audit Finalisation - Reporting MCQs with Answers
10 multiple-choice questions on Audit Finalisation - Reporting for CAF-8 Audit and Assurance Essentials. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
An auditor identifies that the client has failed to provide a depreciation expense for a specific building, leading to a material misstatement. The rest of the financial statements are completely accurate. What type of audit opinion should be expressed?
- A) Unmodified opinion with an Emphasis of Matter
- B) Qualified opinion ('except for')
- C) Adverse opinion
- D) Disclaimer of opinion
Show answer & explanation
Answer: B) Qualified opinion ('except for')
When a misstatement is material but its effects are confined to a specific element (not pervasive to the entire set of financial statements), the auditor expresses a qualified opinion, stating that 'except for' this specific matter, the financial statements present fairly.
Question 2
Management refuses to consolidate a major subsidiary that accounts for 80% of the group's total assets and revenues, in direct violation of IFRS. The auditor concludes the misstatement is both material and pervasive. What is the appropriate audit opinion?
- A) Unmodified opinion
- B) Qualified opinion
- C) Adverse opinion
- D) Disclaimer of opinion
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Answer: C) Adverse opinion
An adverse opinion is required when the auditor obtains sufficient evidence and concludes that misstatements are both material and pervasive. Leaving out 80% of the business renders the entire financial statements highly misleading, warranting an adverse opinion.
Question 3
A massive fire destroys the client's accounting servers, and no backups exist. The auditor cannot verify revenue, receivables, or inventory, representing 90% of the balance sheet. What type of report must the auditor issue?
- A) Qualified opinion
- B) Adverse opinion
- C) Disclaimer of opinion
- D) Unmodified opinion with an Other Matter paragraph
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Answer: C) Disclaimer of opinion
When the auditor is unable to obtain sufficient appropriate audit evidence, and the possible effects of undetected misstatements could be both material and pervasive (affecting 90% of the financials), the auditor must disclaim an opinion.
Question 4
According to ISA 701, 'Key Audit Matters' (KAM) are selected from which specific pool of information?
- A) Matters published in the local financial newspapers.
- B) Matters communicated with those charged with governance.
- C) Matters relating strictly to the prior year's audit.
- D) Immaterial errors found by the junior audit staff.
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Answer: B) Matters communicated with those charged with governance.
Key Audit Matters are defined as those matters that, in the auditor's professional judgment, were of most significance in the audit of the current period. They must be drawn exclusively from the matters that were communicated with those charged with governance.
Question 5
If an auditor is forced to issue a 'Disclaimer of Opinion' on a listed entity due to a pervasive lack of evidence, how does this impact the 'Key Audit Matters' (KAM) section?
- A) The KAM section must be expanded to 10 pages.
- B) The KAM section must list all the missing documents.
- C) Unless required by law, the auditor's report shall NOT include a Key Audit Matters section.
- D) The KAM section replaces the Basis for Disclaimer section.
Show answer & explanation
Answer: C) Unless required by law, the auditor's report shall NOT include a Key Audit Matters section.
ISA 705 explicitly states that when an auditor disclaims an opinion on the financial statements as a whole, they shall not include a KAM section, because discussing specific audit matters might overshadow the severe reality that no opinion could be formed.
Question 6
A client faces a massive, highly publicized lawsuit that threatens its survival. Management has perfectly disclosed this contingent liability in Note 15. The auditor agrees with the disclosure. How should the auditor highlight this to the users?
- A) Modify the audit opinion to a Qualified opinion.
- B) Add an Emphasis of Matter paragraph drawing attention to Note 15, stating the opinion is not modified in respect of this matter.
- C) Add an Other Matter paragraph.
- D) Secretly leak the information to the shareholders.
Show answer & explanation
Answer: B) Add an Emphasis of Matter paragraph drawing attention to Note 15, stating the opinion is not modified in respect of this matter.
An Emphasis of Matter (EOM) paragraph is used to draw users' attention to a matter that is already appropriately presented or disclosed in the financial statements, which is of such fundamental importance that users must understand it. It does not modify the clean opinion.
Question 7
The financial statements of the prior year were audited by a different firm of Chartered Accountants. The incoming auditor wants to explicitly mention this fact in the current year's audit report. Where should this be placed?
- A) In the Emphasis of Matter paragraph.
- B) In an Other Matter paragraph.
- C) In the Basis for Opinion section.
- D) In the Key Audit Matters section.
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Answer: B) In an Other Matter paragraph.
An Other Matter paragraph is used to communicate matters relevant to users' understanding of the audit or the auditor's responsibilities, which are NOT required to be disclosed in the financial statements. Noting that predecessor auditors audited the prior year is a classic example.
Question 8
The auditor concludes that a material uncertainty exists regarding the entity's ability to continue as a going concern, and management has ADEQUATELY disclosed this in the financial statements. What reporting action is required?
- A) Issue an adverse opinion.
- B) Issue an unmodified opinion and include a separate section titled 'Material Uncertainty Related to Going Concern'.
- C) Issue a qualified opinion without further explanation.
- D) Withdraw from the engagement immediately.
Show answer & explanation
Answer: B) Issue an unmodified opinion and include a separate section titled 'Material Uncertainty Related to Going Concern'.
Under ISA 570, if the material uncertainty is adequately disclosed, the auditor expresses an unmodified opinion but must draw attention to the disclosure by including a specific, separately titled section: 'Material Uncertainty Related to Going Concern'.
Question 9
Management prepares the financial statements on a going concern basis, but the auditor definitively concludes that the entity is bankrupt and will cease trading within a month. What is the required audit opinion?
- A) Unmodified opinion with an Emphasis of Matter
- B) Qualified opinion
- C) Adverse opinion
- D) Disclaimer of opinion
Show answer & explanation
Answer: C) Adverse opinion
If the financial statements are prepared on a going concern basis, but the auditor concludes that the use of the going concern basis is fundamentally inappropriate, the entire foundation of the financial statements is wrong. This is pervasive, requiring an adverse opinion.
Question 10
When an auditor issues a modified opinion (e.g., a Qualified Opinion) due to a material misstatement relating to specific amounts, what must be included in the 'Basis for Qualified Opinion' paragraph?
- A) A formal apology to the board of directors.
- B) The personal home address of the CFO.
- C) A description and quantification of the financial effects of the misstatement, unless impracticable.
- D) A list of all the junior auditors who found the error.
Show answer & explanation
Answer: C) A description and quantification of the financial effects of the misstatement, unless impracticable.
ISA 705 requires that the basis for modification paragraph must clearly describe the matter giving rise to the modification and quantify its financial effects (e.g., 'Inventory is overstated by Rs. 5 million, and profit is overstated by Rs. 5 million'), so users understand the impact.