QUESTION: 1941

When financial statements are presented that are not in conformity with generally accepted accounting principles, an auditor may express a Qualified Opinion Disclaimer of an Opinion

Qualified Opinion Disclaimer of an Opinion

Yes No
II. Yes Yes
III. No Yes
IV. No No
II
III
I
IV

Answer(s): C

Explanation:

Departures from GAAP may result in either a qualified or an adverse opinion. The auditor must exercise judgment as to the materiality of the departure. If the departure from GAAP is not sufficiently material to require an adverse opinion, the auditor should express a qualified opinion.

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QUESTION: 1942

Companies A and B, similar in all respects, recently bought identical securities. However, using the "Management intent" rule, A has classified the securities as "trading" securities while B has categorized them as "available-for-sale" securities. Which of the following statements is/are true as a result of this difference?

A and B will show same assets on their balance sheets.
II. A will have a higher income volatility than B.
III. A will have a higher cash flow volatility than B.
II & III
III only
I & III
I, II & III

Answer(s): D

Explanation:

Both "trading" and "available-for-sale" securities are reported at their fair market value on the balance sheet.
Hence, the reported assets for A and B are not affected by the different classifications. However, changes in the market value of trading securities are considered part of the Income statement while changes in the market value of available-for-sale securities are charged directly to the retained earnings account. This will cause a higher volatility in the income of A. Further, this higher volatility in income leads to a higher volatility in tax payments, thus causing a higher volatility in the cash flows.

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