Today's question: AUD

An auditor concludes that there is a material inconsistency in the other information in an annual report to shareholders containing audited financial statements. If the auditor concludes that the financial statements do not require revision, but the client refuses to revise or eliminate the material inconsistency, the auditor may:

A) Issue an "except for" qualified opinion after discussing the matter with the client's board of directors.

B) Consider the matter closed since the other information is not in the audited financial statements.

C) Disclaim an opinion on the financial statements after explaining the material inconsistency in a separate explanatory paragraph.

D) Revise the auditor's report to include a separate explanatory paragraph describing the material inconsistency.

Correct Answer: D

Explanation: The auditor's responsibility with respect to information in an annual report does not extend beyond the financial information identified in his report. However, he should read the other information and consider whether it is materially inconsistent with information appearing in the financial statements. If he concludes that the other information is inconsistent and the client refuses to correct the inconsistency, the auditor should either revise his report to include an explanatory paragraph describing the material inconsistency, withhold the use of his report in the annual report, or withdraw from the engagement.

Today's question: BEC

As a company becomes more conservative in its working capital policy, it would tend to have a(n)

A) Decrease in its acid-test ratio.

B) Increase in the ratio of current liabilities to noncurrent liabilities.

C) Increase in the ratio of current assets to units of output.

D) Increase in funds invested in common stock and a decrease in funds invested in marketable securities.

Correct Answer: C

Explanation: A conservative working capital policy results in an increase in working capital. Therefore, current assets increase. Working capital = current assets minus current liabilities. A conservative working capital policy reduces the liquidity risk. A decrease in acid test ratio means that quick assets such as cash, receivables and marketable securities are decreasing in proportion to current liabilities and this results in lower working capital. Increases in the ratio of current liabilities to noncurrent liabilities increases liquidity risk, and represents a less conservative working capital policy. As a company becomes more conservative in its working capital policy, it will not increase the funds invested in common stock (long term) and decrease funds invested in marketable securities (short term).

Today's question: AUD

When there is a significant change in accounting principle, an auditor's report should refer to the lack of consistency in:

A) The scope paragraph

B) An explanatory paragraph between the second paragraph and the opinion paragraph

C) The opinion paragraph

D) An explanatory paragraph following the opinion paragraph