Auditing and Attestation- Certified Public Accountant (CPA) Practice Exam -

In an auditor's report, what does the phrase "We did not audit the financial statements of JK Co." signify?

1. It divides responsibility.

2. It disclaims an opinion.

3. It qualifies the opinion.

4. It indicates an improper form of reporting.

The correct answer is: It divides responsibility.

The phrase "We did not audit the financial statements of JK Co." signifies that the auditor is sharing the responsibility for the financial statements with another party, which is typically the management of JK Co. This indication is important in ensuring transparency about the auditor's role and the extent of their procedures. By specifying that they did not audit those statements, the auditor clarifies that they are not responsible for verifying the accuracy or completeness of that information. Dividing responsibility helps users of the report understand which elements of the financial statements the auditor has examined and which elements were prepared without their direct involvement. This division is particularly relevant when considering subsidiaries or components of a larger organization, where the auditor may not have full oversight of all entities involved. The other options do not accurately capture the meaning of this phrase. While disclaiming an opinion would suggest a more extensive detachment from the financial statements, dividing responsibility does not imply a complete disclaimer. Qualifying the opinion implies that there are specific concerns regarding the financial statements, and indicating improper form of reporting does not apply here as the phrase is a standard disclosure practice in auditing. Thus, the concept of dividing responsibility best aligns with the intent and meaning behind the phrasing in question.