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B. The auditor decides to refer to the report of another auditor as a basis, in part, for the auditor's opinion.

In which of the following situations would an auditor ordinarily issue an unqualified/unmodified financial statement audit opinion with no explanatory (or emphasis-of-matter/other-matter) paragraph?
A. The auditor wishes to emphasize that the entity had significant related-party transactions.
B. The auditor decides to refer to the report of another auditor as a basis, in part, for the auditor's opinion.
C. The entity issues financial statements that present financial position and results of operations but omits the statement of cash flows.
D. The auditor has substantial doubt about the entity's ability to continue as a going concern, but the circumstances are fully disclosed in the financial statements.

C. Unqualified opinion.

A public entity changed from the straight-line method to the declining balance method of depreciation for all newly acquired assets. This change has no material effect on the current year's financial statements but is reasonably certain to have a substantial effect in later years. The client's financial statements contain no material misstatements and the auditor concurs with this change. If the change is disclosed in the notes tot the financial statements, the auditor should issue a report with a(n):
A. "Except for" qualified opinion.
B. Explanatory paragraph.
C. Unqualified opinion.
D. Consistency modification.

A. Is appropriate and would not negate the unmodified opinion.

An auditor includes a separate paragraph in an otherwise unmodified financial statement audit report to emphasize that the entity being reported upon had significant transactions with related parties. The inclusion of this separate paragraph
A. Is appropriate and would not negate the unmodified opinion.
B. Is considered an "except for" qualification of the opinion.
C. Violates generally accepted auditing standards if this information is already disclosed in footnotes to the financial statements.
D. Necessitates a revision of the opinion paragraph to include the phrase "with the foregoing explanation."

A. A qualified opinion or a disclaimer of opinion.

Eagle Company, a public company, had a computer failure and lost part of its financial data. As a result, the auditor was unable to obtain sufficient audit evidence relating to Eagle's inventory account. Assuming the inventory account is at least material, the auditor would most likely choose either
A. A qualified opinion or a disclaimer of opinion.
B. A qualified opinion or an adverse opinion.
C. An unqualified opinion with no explanatory paragraph or an unqualified opinion with an explanatory paragraph.
D. A qualified opinion with no explanatory paragraph or a qualified opinion with an explanatory paragraph.

A. Lack of sufficient evidence.

Tech Company has disclosed an uncertainty due to pending litigation. The auditor's decision to issue a qualified opinion on Tech's financial statements would most likely result from
A. Lack of sufficient evidence.
B. Inability to estimate the amount of loss.
C. Entity's lack of experience with such litigation.
D. Lack of insurance coverage for possible losses from such litigation.

A. Departure from generally accepted accounting principles.

In which of the following circumstances would an auditor usually choose between issuing a qualified opinion or an adverse opinion on a client's financial statements?
A. Departure from generally accepted accounting principles.
B. Inadequate disclosure of accounting policies.
C. Inability to obtain sufficient competent evidence.
D. Unreasonable justification for a change in accounting principle.

C. Unmodified opinion.

King, CPA, was engaged to audit the financial statements of Chang Company, a private company, after its fiscal year had ended. King neither observed the inventory count nor confirmed the receivables by direct communication with debtors but was satisfied that both were fairly stated after applying appropriate procedures. King's financial statement audit report most likely contained a(n)
A. Qualified opinion.
B. Disclaimer of opinion.
C. Unmodified opinion.
D. Unmodified opinion with an emphasis-of-matter paragraph.

B. Indicate in the auditor's report that the predecessor auditor expressed an unqualified opinion.

Comparative financial statements for a public company include the prior year's statements, which were audited by a predecessor auditor. The predecessor's report is not presented along with the comparative financial statements. If the predecessor's report was unqualified, the successor should
A. Express an opinion on the current year's statements alone and make no reference tot he prior year's statements.
B. Indicate in the auditor's report that the predecessor auditor expressed an unqualified opinion.
C. Obtain a letter of representations from the predecessor concerning any matters that might affect the successor's opinion.
D. Request that the predecessor auditor reissue the prior year's report.

B. A departure from generally accepted accounting principles caused an adverse opinion on the prior year's financial statements, and those statements have been properly restated.

When reporting on comparative financial statements for a private company, which of the following circumstances should ordinarily cause the auditor to change the previously issued opinion on the prior year's financial statements?
A. The prior year's financial statements are restated following the purchase of another company in the current year.
B. A departure from generally accepted accounting principles caused an adverse opinion on the prior year's financial statements, and those statements have been properly restated.
C. A change in accounting principle causes the auditor to make a consistency modification in the current year's audit report.
D. A scope limitation caused a qualified opinion on the prior year's financial statements, but the current year's opinion is properly unmodified.

B. The auditor has no obligation to corroborate the "other information" but should read the "other information" to determine whether it is materially inconsistent with the financial statements.

Which of the following best describes the auditor's responsibility for "other information" included in the annual report to stockholders that contains financial statements and the auditor's report?
A. The auditor has no obligation to read the "other information."
B. The auditor has no obligation to corroborate the "other information" but should read the "other information" to determine whether it is materially inconsistent with the financial statements.
C. The auditor should extend the examination to the extent necessary and verify the "other information."
D. The auditor must modify the auditor's report to state that the other information "is unaudited" or "is not covered by the auditor's report."

C. States that the income tax basis of accounting is a basis of accounting other than generally accepted accounting principles.

When reporting on financial statements prepared on the basis of accounting used for income tax purposes, the auditor should include in the report a paragraph that
A. Emphasizes that the financial statements have not been examined in accordance with generally accepted auditing standards.
B. Refers to the authoritative pronouncements that explain the income tax basis of accounting being used.
C. States that the income tax basis of accounting is a basis of accounting other than generally accepted accounting principles.
D. Justifies the use of income tax basis of accounting.

C. Accept the engagement provided the auditor's opinion is expressed in a special report.

When an auditor is asked to express an opinion on an entity's rent and royalty revenues, he or she may
A. Not accept the engagement because to do so would be tantamount to agreeing to issue a piecemeal opinion.
B. Not accept the engagement unless also engaged to audit the full financial statements of the entity.
C. Accept the engagement provided the auditor's opinion is expressed in a special report.
D. Accept the engagement provided distribution of the auditor's report is limited to the entity's management.

A. Provide the auditor with a final, overall evaluation of the relationships among financial statement balances.

Final analytical procedures are generally intended to
A. Provide the auditor with a final, overall evaluation of the relationships among financial statement balances.
B. Test transactions to corroborate management's financial statement assertions.
C. Gather evidence concerning account balances that have not yet been investigated.
D. Retest control activities that appeared to be ineffective during the assessment of control risk.

A. Review compliance with the terms of debt agreements.

Which of the following audit procedures is most likely to assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern?
A. Review compliance with the terms of debt agreements.
B. Review management's plans to dispose of assets.
C. Evaluate management's plans to borrow money or restructure debt.
D. Consider management's plans to reduce or delay expenditures.

A. A conversation with those charged with governance to discuss matters pertaining to financial reporting.

Auditing standards primarily encourage which of the following conversations about financial reporting?
A. A conversation with those charged with governance to discuss matters pertaining to financial reporting.
B. A conversation with only management to discuss matters pertaining to financial reporting.
C. A conversation with the head of the client's internal audit department and those charged with governance to discuss matters pertaining to financial reporting.
D. A conversation in which those charged with governance report on management's views on matters pertaining to financial reporting.

A. Yes; Yes

Which of the following matters should an auditor communicate to those charged with governance?
Significant Audit Adjustments; Management's Consultations with Other Accountants
A. Yes; Yes
B. Yes; No
C. No; Yes
D. No; No

C. The discovery of information regarding a contingency that existed before the financial statements were issued.

Which of the following events occurring after the issuance of a set of financial statements and the accompanying auditor's report would be most likely to cause the auditor to make further inquiries about the financial statements?
A. A technological development in the industry that could affect the entity's further ability to continue as a going concern.
B. The entity's sale of a subsidiary that accounts for 30 percent of the entity's consolidated sales.
C. The discovery of information regarding a contingency that existed before the financial statements were issued.
D. The final resolution of a lawsuit explained in a separate paragraph of the auditor's report.

C. Letter from the entity's general legal counsel.

An auditor would be most likely to identify a contingent liability by obtaining a(n)
A. Accounts payable confirmation.
B. Bank confirmation of the client's cash balance.
C. Letter from the entity's general legal counsel.
D. List of subsequent cash receipts.

D. Corroboration of the information furnished by management concerning litigation, claims, and assessments.

An auditor should request that an audit client send a letter of inquiry to those attorneys who have been consulted concerning litigation, claims, or assessments. The primary reason for this request is to provide
A. The opinion of a specialist as to whether loss contingencies are possible, probable, or remote.
B. A description of litigation, claims, and assessments that have a reasonable possibility of unfavorable outcome.
C. An objective appraisal of management's policies and procedures adopted for identifying and evaluating legal matters.
D. Corroboration of the information furnished by management concerning litigation, claims, and assessments.

A. Limited to the specific event referenced.

An auditor issued an audit report that was dual dated for a subsequent event occurring after the date on which the auditor has obtained sufficient appropriate audit evidence but before issuance of the financial statements. The auditor's responsibility for events occurring subsequent to the date on which the auditor has obtained sufficient appropriate audit evidence was
A. Limited to the specific event referenced.
B. Extended to include all events occurring since the date on which the auditor has obtained sufficient appropriate audit evidence.
C. Extended to subsequent events occurring through the date of issuance of the report.
D. Limited to events occurring up to the date of the last subsequent event referenced.

B. Examine relevant internal audit reports issued the subsequent period.

Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of any changes in internal control that might affect financial reporting between the end of the reporting period and the date of the auditor's report?
A. Review a fire insurance settlement during the subsequent period.
B. Examine relevant internal audit reports issued the subsequent period.
C. Inquire of the entity's legal counsel concerning litigation, claims, and assessments arising after year-end.
D. Confirm bank accounts established after year-end.

D) Examining accounts payable confirmations.

When auditing contingent liabilities, which of the following procedures would generally be least effective?
A) Reading the minutes of the board and other committee meetings.
B) Examining all IRS documentation related to possible tax disputes.
C) Examining legal letters.
D) Examining accounts payable confirmations.

C) Warranty payable.

Which of the following is an example of a contingent liability?
A) Accounts payable.
B) Long term debt.
C) Warranty payable.
D) All liabilities are "contingent."

D) A chemical explosion at a customer's warehouse causes all accounts receivable from that customer to be uncollectible.

Which of the following is an example of a subsequent event that requires disclosure in the notes to the financial statements (but not adjustments to the financial statements)?
A) A client's customer, who has been experiencing financial difficulty for several months, declares bankruptcy. The customer is one of over 1000 customers of the client and appropriate reserves for any related accounts receivable have been properly maintained.
B) The client completes an environmental cleanup. The liability for the clean-up was recorded as a contingent liability at the balance sheet date.
C) An event that confirms the auditor's belief that a large portion of the client's inventory is obsolete. The issue was documented prior to the end of the fiscal year and appropriate inventory adjustments were made at the balance sheet date.
D) A chemical explosion at a customer's warehouse causes all accounts receivable from that customer to be uncollectible.

D) Limited to the specific event referred to.

With respect to the issuance of an audit report that is dual dated because of an event occurring after the date on which the auditor has obtained sufficient appropriate audit evidence but before the audit report was issued, the auditor's responsibility for events occurring after the completion of fieldwork is
A) Extended to include all events occurring before the audit report is issued.
B) Nonexistent- auditors have no responsibility for subsequent events.
C) Extended to cover the period up to the issuance of the next audit report.
D) Limited to the specific event referred to.

C) Additional detail tests of account balances are necessary.

Analytical procedures performed at the overall review stage of an audit appear to indicate that several accounts have unexpected balances and/or relationships. The result of these procedures most likely would indicate that
A) Internal control activities are not operating effectively.
B) The communications with the audit committee should be revised.
C) Additional detail tests of account balances are necessary.
D) Fraud exists among the relevant account balances involved.

B) Normal trade credit from major suppliers has recently been restricted or denied.

Which of the following conditions or events most likely would cause an auditor to have substantial doubt about an entity's ability to continue as a going concern?
A) Communications with the audit committee indicate a higher than normal rate of employee turnover.
B) Normal trade credit from major suppliers has recently been restricted or denied.
C) There are a significant number of related party transactions occurring.
D) Plans to repurchase a large block of treasury stock have been delayed.

B) Seven years, unless a longer period is required by state law.

According to the Public Company Accounting Oversight Board's (PCAOB) third auditing standard related to audit documentation and retention, an auditor should retain audit documentation for how long of a period of time beyond completion of the engagement?
A) Seven years, unless a shorter period is required by state law.
B) Seven years, unless a longer period is required by state law.
C) Seven years for electronic documentation; ten years for physical documentation.
D) The same period as required under state tax law.

B) March 12th; March 12th.

Dewey, Needham, & Howe accept an engagement to audit the 2011 financial statements of Syracuse Co. and begin fieldwork in September 2011. Syracuse (December 31st year-end) gives the unaudited financial statements to the auditors on 1/17/2012. The auditors completed the fieldwork on 3/12/2012 and distributed the audit report on 3/23/2012. The client's letter of representation should be dated ________ and the audit report should be dated __________.
A) March 23rd; March 12th.
B) March 12th; March 12th.
C) January 17th; March 23rd.
D) March 23rd; March 23rd.

C) Fraud involving employees with significant roles in the internal control system.

To which of the following matters would an auditor not apply materiality limits when obtaining specific written client representations?
A) Disclosure of compensating balance arrangements involving restrictions on cash balances.
B) Information concerning related-party transactions and related amounts receivable or payable.
C) Fraud involving employees with significant roles in the internal control system.
D) The absence of errors and unrecorded transactions in the financial statements.

C) New information is discovered leading the auditor to believe that lease transactions during the audit period should have been accounted for as capital rather than operating leases.

Which of the following material events occurring after the issuance of an auditor's report would most likely cause the auditor to make further inquiries about the previously issued financial statements to determine if they may need to be restated?A) An uninsured flood occurs that may affect the entity's ability to continue as a going concern.
B) A major contingency is resolved that had been disclosed in the audited financial statements.
C) New information is discovered leading the auditor to believe that lease transactions during the audit period should have been accounted for as capital rather than operating leases.
D) A subsidiary is sold that accounts for 25% of the entity's consolidated revenues.

A) Probable.

According to FASB ASC Topic 450, "Contingencies," which of the following terms means that the future event is "likely to occur"?
A) Probable.
B) Likely.
C) Reasonably possible.
D) More than remote.

C) The lawyer and the auditor.

A lawyer's response to an auditor's inquiry concerning litigation, claims, and assessments may be limited to matters that are considered individually or collectively material to the client's financial statements. Which parties should reach an understanding on the limits of materiality for this purpose?
A) The auditor and the client's management.
B) The client's audit committee and the lawyer.
C) The lawyer and the auditor.
D) The client's management and the lawyer.

D) Are disclosed in a footnote to the financial statements.

In most cases, commitments
A) Are likely to result in additional losses to the client.
B) Are found through the accounts payable search for unrecorded liabilities.
C) Require adjustments to the financial statement amounts.
D) Are disclosed in a footnote to the financial statements.

D) Extending the search for unrecorded liabilities to the report date.

All of the following are typical audit procedures used to identify subsequent events except:
A) Inquiring of management as to their knowledge of subsequent events.
B) Reading available interim financial statements from after year end.
C) Reading board meeting minutes for meetings held after year end.
D) Extending the search for unrecorded liabilities to the report date.

C) The planned audit procedures for the audit.

The auditor must communicate several items to "those charged with governance" at the conclusion of the audit. Which of the following is not a typical communication?
A) Significant audit adjustments.
B) The auditor's responsibilities under GAAS.
C) The planned audit procedures for the audit.
D) The planned scope and timing of the audit.

B) Auditor obtains reasonable assurance about whether the financial statements are free of material misstatement.

The existence of audit risk is best recognized by the statement in the standard auditor's report that the
A) Opinion is based, in part, on the report of other auditors.
B) Auditor obtains reasonable assurance about whether the financial statements are free of material misstatement.
C) Audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.
D) Auditor is responsible for expressing an opinion on the financial statements, which are the responsibility of management.

C) A statement that although estimates are believed to be reasonable, there are normally differences between actual and estimated results.

The basic elements of a standard unqualified/unmodified report include all of the following except:
A) A statement that the financial statements are the responsibility of management.
B) A title that includes the word "Independent."
C) A statement that although estimates are believed to be reasonable, there are normally differences between actual and estimated results.
D) A statement that an audit includes examining supporting "significant accounting estimates made by management."

A) The portion or parts of the financial statements examined by the other auditors.

If the principal auditor decides to make reference to other auditors used in the engagement, the audit report must make reference to
A) The portion or parts of the financial statements examined by the other auditors.
B) The name of the other auditor.
C) Whether or not a subsidiary corporation was examined.
D) Whether the other auditors are members of the SEC Division of firms.

D) The client failed to make a large debt payment during the subsequent event period.

In which of the following situations is an auditor permitted to issue an unqualified/unmodified report (assume all information is material)?
A) The client has omitted required footnote disclosures.
B) The auditor is not independent of the client.
C) The auditor is unable to gather sufficient evidence in support of assets reported by a consolidated subsidiary.
D) The client failed to make a large debt payment during the subsequent event period.

D) Issue a qualified opinion.

An auditor notifies management that there is a material inconsistency between information in the audited financial statements and other information provided in the annual report. If management refuses to correct the material inconsistency, the auditor is not permitted to
A) Include an explanatory/emphasis-of-matter paragraph in the otherwise unqualified/unmodified audit report.
B) Withhold the audit report until the material is presented consistently.
C) Withdraw from the engagement.
D) Issue a qualified opinion.

B) The auditor will generally issue a qualified report or disclaim an opinion.

Which of the following is true with respect to a scope limitation?
A) The auditor can choose to issue an adverse report or disclaim an opinion.
B) The auditor will generally issue a qualified report or disclaim an opinion.
C) The auditor may not issue an unqualified/unmodified report even if the auditor can compensate for the scope limitation by performing alternative procedures.
D) The auditor should withdraw from the engagement.

C) The possible effects of the inadequacy in the client's records on the financial statements.

An auditor decides to issue a qualified opinion on an entity's financial statements because a major inadequacy in the entity's electronic accounting records prevents the auditor from applying necessary procedures. The opinion paragraph of the auditor's report should state that the qualification pertains to
A) A client-imposed scope limitation.
B) A departure from generally accepted auditing standards.
C) The possible effects of the inadequacy in the client's records on the financial statements.
D) Inadequate disclosure of necessary information.

A) Express an unqualified opinion concerning the restated financial statements.

An auditor has previously expressed a qualified opinion on the financial statements of a prior period because of a departure from generally accepted accounting principles. The prior-period financial statements are restated in the current period to conform to generally accepted accounting principles. The auditor's updated report on the prior-period financial statements for this public company should
A) Express an unqualified opinion concerning the restated financial statements.
B) Be accompanied by the original auditor's report on the prior period.
C) Bear the same date as the original auditor's report on the prior period.
D) Qualify the opinion concerning the restated financial statements because of a change in accounting principle.

B) The inventory account is misstated due to improper application of the lower-of-cost-or-market principle.

In which of the following situations would an auditor ordinarily choose between expressing a qualified opinion or an adverse opinion?
A) The auditor did not observe the entity's physical inventory and is unable to become satisfied about its balance by other auditing procedures.
B) The inventory account is misstated due to improper application of the lower-of-cost-or-market principle.
C) There has been a change in accounting principles that has a material effect on the comparability of the entity's financial statements.
D) The auditor is unable to apply necessary procedures concerning an investor's share of an investee's earnings recognized on the equity method.

C) Qualify the opinion and disclose his reservations in an explanatory/emphasis-of-matter paragraph.

Nationwide Life Insurance Co. prepares its financial statements using an accounting basis required according to the rules of its state insurance commission. Fagan, Nationwide's independent auditor, discovers that the financial statements are not titled properly. Nationwide refuses to correct the error. Fagan should
A) Explain in the notes to the financials the terminology used.
B) Issue a special statutory basis report that disclaims an opinion on the financials.
C) Qualify the opinion and disclose his reservations in an explanatory/emphasis-of-matter paragraph.
D) Appeal to the state insurance commission for an advisory opinion.

B) Change in accounting estimate.

Which of the following is a change that does not affect consistency of the financial statements?
A) Change in accounting principle.
B) Change in accounting estimate.
C) Change in reporting entity.
D) Correction of an error in principle.

B) Change in reporting entity.

Which of the following is a change that affects the consistency of the financial statements?
A) Correction of an error that does not involve an accounting principle.
B) Change in reporting entity.
C) Change in classification of assets from long-term to current.
D) Change expected to have a material future effect.

D) Adverse.

What type of report is issued when the financial statements are not presented fairly?
A) Unqualified/Unmodified.
B) Qualified.
C) Highly qualified.
D) Adverse.

D) The auditor is unable to apply necessary procedures concerning the client's share of an investee's earnings recognized on the equity method.

Which of the following is not a situation that would require explanatory language in an unqualified/unmodified report?
A) The opinion is based, in part, on the report of another auditor.
B) The financial statements lack consistency due to an accounting change.
C) The auditor wishes to emphasize a matter.
D) The auditor is unable to apply necessary procedures concerning the client's share of an investee's earnings recognized on the equity method.

C) Timeline paragraph.

Which of the following is not a major element of an unqualified/unmodified report?
A) Introductory paragraph.
B) Scope paragraph.
C) Timeline paragraph.
D) Opinion paragraph.

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