Audit section 1 questions

88 terms by maddogdil 

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CPA

The fourth standard of reporting requires the auditor's report to contain either an expression of opinion
regarding the financial statements taken as a whole or an assertion to the effect that an opinion cannot be
expressed. The objective of the fourth standard is to prevent:
a. An auditor from expressing different opinions on each of the basic financial statements.
b. Restrictions on the scope of the audit, whether imposed by the client or by the inability to obtain
evidence.
c. Misinterpretations regarding the degree of responsibility the auditor is assuming.
d. An auditor from reporting on one basic financial statement and not the others.

C: the objective of the fourth reporting standard is to prevent any misinterpretation of the degree of responsibility the auditor assumes when his or her name is associated with financial statements

2. Harris, CPA, has been asked to audit and report on the balance sheet of Fox Co" but not on the
statements of income, retained earnings, or cash flows. Harris will have access to all information
underlying the basic financial statements. Under these circumstances, Harris may:
a. Not accept the engagement because it would constitute a violation of the profession's ethical
standards.
b. Not accept the engagement because it would be tantamount to rendering a piecemeal opinion.
c. Accept the engagement because such engagements merely involve limited reporting objectives.
d. Accept the engagement but should disclaim an opinion because of an inability to apply the
procedures considered necessary.

C) an auditor may express an opinion on one financial statements, such as a balance sheet, and not on other related financial statements, provided that the auditor's procedures and access to all information underlying the basic financial statements have been restricted.

Management believes and the auditor is satisfied that a material loss probably will occur when pending
litigation is resolved. Management is unable to make a reasonable estimate of the amount or range of
the potential loss, but fully discloses the situation in the notes to the financial statements. If management
does not make an accrual in the financial statements, the auditor should express a(an):
a. Qualified opinion due to a scope limitation.
b. Qualified opinion due to a departure from GAAP.
c. Unqualified opinion with an explanatory paragraph,
d. Unqualified opinion in a standard auditor's report.

D: if a contingent liability is probably but not estimable, and it is disclosed in the footnotes, the auditor issues an unqualified audit report w/o an explanatory paragraph.

A principal auditor decides not to refer to the audit of another CPA who audited a subsidiary of the
principal auditor's ciient. After making inquiries about the other CPA's professional reputation and
independence, the principal auditor most likely would:
a. Add an explanatory paragraph to the auditor's report indicating that the subsidiary's financial
statements are not material to the consolidated financial statements.
b. Document in the engagement letter that the principal auditor assumes no responsibility for the other
CPA's work and opinion.
c. Obtain written permission from the other CPA to omit the reference in the principal auditor's report.
d. Contact the other CPA and review the audit programs and audit documentation pertaining to the
subsidiary.

D) when the principal auditor decides not to make reference to the audit of the other auditor, in addition to satisfying himself or herself as to the other auditor's professional reputation and independence, he or she should visit the other auditor, discuss the audit procedures and review the audit programs and audit documentation of the other auditor.

Which of the following phrases would an auditor most likely include in the auditor's report when
expressing a qualified opinion because of inadequate disclosure?
a. Subject to the departure from generally accepted accounting principles, as described above.
b. With the foregoing explanation of these omitted disclosures.
c. Except for the omission of the information discussed in the preceding paragraph.
d. Does not present fairly in all material respects.
Al-

C) the only phrase acceptable in a qualified opinion is "except for" in the presence of inadequate disclosure, the auditor's opinion would state " in our opinion, except for the omission of the information discussed in the preceding paragraph

An auditor concludes that a client's illegal act, which has a material effect on the financial statements, has
not been properly accounted for or disclosed. Depending on the materiality of the effect on the financial
statements, the auditor should express either a(an):
a. Adverse opinion or a disclaimer of opinion.
b. Qualified opinion or an adverse opinion.
c. Disclaimer of opinion or an unqualified opinion with a separate explanatory paragraph.
d. Unqualified opinion with a separate explanatory paragraph or a qualified opinion.

b) if the financial statements including accompanying notes, fail to disclose information that is required by GAAP, the auditor should express a qualified or adverse opinion.

When qualifying an opinion because of an insufficiency of audit evidence, an auditor should refer to the
situation in the:
Opening (introductory)
Scope paragraph

When qualified opinion results form a lack of audit evidence, the situation should be described in an explanatory paragraph preceding the opinion paragraph and referred to in both the scope and opinion paragraphs.

As of August 13, a CPA had obtained sufficient appropriate audit evidence with respect to fieldwork on an
engagement to audit financial statements for the year ended June 30. On August 27, an event came to
the CPA's attention that should be disclosed in the notes to the financial statements. The event was
properly disclosed by the entity, but the CPA decided not to dual date the auditor's report and dated the
report August 27. Under these circumstances, the CPA was taking responsibility for:
a. All subsequent events that occurred through August 27.
b. Only the specific subsequent event disclosed by the entity.
c. All subsequent events that occurred through August 13 and the specific subsequent event disclosed
by the entity.
d. Only the subsequent events that occurred through August 13.

A) if teh auditor chooses to use the later date for the report, this extends his/her responsibility for all subsequent events to this later date.

What is an auditor's responsibility for supplementary information, such as the disclosure of pension
information, which is outside the basic financial statements but required by the GASB?
a. The auditor should apply substantive tests of transactions to the supplementary information and verify
its conformity with the GASB requirement.
b. The auditor should apply certain limited procedures to the supplementary information and add an
explanatory paragraph to the financial statement audit report.
c. The auditor's only responsibility for the supplementary information is to determine that such
information has not been omitted.
d. The auditor has no responsibility for such supplementary information as iong as it is outside the basic
financial statements.

The auditor should perform limited procedures on supplementary information accompanying the financial statements. In addition the auditor's report on the financial statements should include an explanatory paragraph regarding the required supplementary information.

Under the ethical standards of the profession in the United States, which of the following circumstances
would impair independence in the audit of an issuer but would not impair independence in the audit of a
nonissuer?
a. The firm performing the financial statement audit also designed and implemented the client's financial
information system.
b. The audit firm provided a loan to the client during the prior year.
c. The lead partner has worked on the audit engagement of a client for ten years.
d. The audit firm has an immaterial direct financial interest in the client.

The ethical standards that apply to the audits of issuers (sox/pcaob/sec) require that the lead partner rotate offf the audit engagements every 5 years. aicpa code of professional conduct which is followed when auditing nonissuers does not require partner rotation.

Under U.S. auditing standards, when an auditor believes there is substantial doubt about the ability of an
entity to continue as a going concern, all of the following should be included in the audit documentation ,
except:
a. The conditions that gave rise to the substantial doubt.
b. The auditor's conclusion about whether substantial doubt remains or is alleviated.
c. Management's conclusion regarding whether substantial doubt remains or is alleviated .
d. The effect of the auditor's conclusion on the auditor's report.

Choice "c" is correct. Whether substantial doubt remains or is alleviated is a judgment call made by the
auditor, and there is no requirement to document management's opinion on the matter under U.S. auditing
standards. Under International Standards on Auditing, management must assess the entity's ability to
continue as a going concern and the auditor must evaluate this assessment and document the evaluation in
the audit workpapers.

After considering an entity's negative trends and financial difficulties, an auditor has substantial doubt about
the entity's ability to continue as a going concern. The auditor's considerations relating to management's plans for dealing with the adverse effects of these conditions most likely would include management's plans
to:
a. Increase current dividend distributions.
b. Reduce existing lines of credit.
c. Increase ownership equity.
d. Purchase assets formerly leased.

Choice "c" is correct. The auditor considers any of management's plans that might serve to mitigate the
adverse effects of particular conditions and events. Typically, plans to increase ownership equity, to borrow
money, to restructure debt, to sell assets, andlor to reduce or delay expenditures might all be considered
mitigating factors.

The auditor's standard report should include reference to the United States as the country of origin of:
I. The accounting principles used to prepare the financial statements.
II. The auditing standards the auditor followed in performing the audit.

The auditor's standard report should include reference to the United States as the
country of origin of both the accounting principles used to prepare the financial statements and the auditing
standards the auditor followed in performing the audit.

A scope limitation sufficient to preclude an unqualified opinion always will result when management:
a. Prevents the auditor from reviewing the audit documentation of the predecessor auditor.
b. Engages the auditor after the year-end physical inventory is completed.
c. Requests that certain material accounts receivable not be confirmed.
d. Refuses to acknowledge its responsibility for the fair presentation of the financial statements in conformity
with GAAP.

Choice "d" is correct. The introductory paragraph of the standard unqualified report includes a statement that
the financial statements are the responsibility of the company's management. Management's refusal to
accept responsibility for the fair presentation of the financial statements therefore precludes issuance of this
standard report.

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. Conditions that cause the auditor to have substantial doubt about the entity's ability to continue as a going
concern are inadequately disclosed .
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.

Choice "b" is correct. Inadequate disclosure of the substantial doubt about an entity's ability to continue as a
going concern is a departure from GAAP, resulting in either a qualified or adverse opinion.

Pell , CPA, decides to serve as principal auditor in the audit of the financial statements of Tech Consolidated ,
Inc. Smith, CPA, audits one of Tech's subsidiaries. In which situation(s) should Pell make reference to
Smith's audit?
I. Pell reviews Smith's audit documentation and assumes responsibility for Smith's work, but expresses a
qualified opinion on Tech's financial statements.
II. Pell is unable to review Smith's audit documentation ; however, Pell's inquiries indicate that Smith has an
excellent reputation for professional competence and integrity.

The principal auditor makes reference in the audit report to the work of the other auditor
when the principal auditor is unable to review the other auditor's audit documentation. This is because the
principal auditor will be unable to be satisfied concerning the work performed by the other auditor. Even
though the other auditor has an excellent reputation, the principal auditor must see the work to be able to
assume responsibility for it.

Cooper, CPA, believes there is substantial doubt about the ability of Zero Corp. to continue as a going
concern for a reasonable period of time. In evaluating Zero's plans for dealing with the adverse effects of
future conditions and events, Cooper most likely would consider, as a mitigating factor, Zero's plans to:
a. Discuss with lenders the terms of all debt and loan agreements.
b. Strengthen internal controls over cash disbursements.
c. Purchase production facilities currently being leased from a related party.
d. Postpone expenditures for research and development projects.

Choice "d" is correct. When assessing management's plans for dealing with the adverse effects of future
conditions and events, mitigating factors would include:
1. The postponement of expenditures (including R&D),
2. Plans to dispose of assets,
3. Plans to borrow money or restructure debt,
4. Plans to increase ownership equity (sell stock).

Which of the following statements is a basic element of the auditor's standard report under U.S. auditing
standards?
a. The disclosures provide reasonable assurance that the financial statements are free of material
misstatement.
b. The auditor evaluated the overall internal control.
c. An audit includes assessing significant estimates made by management.
d. The financial statements are consistent with those of the prior period

Choice "c" is correct. Under U.S. auditing standards, the auditor's standard audit report includes a statement
that "An audit includes assessing ... significant estimates made by management..."

An auditor most likely would express an unqualified opinion and would not add explanatory language to the
report if the auditor:
a. Wishes to emphasize that the entity had significant transactions with related parties.
b. Concurs with the entity's change in its method of computing depreciation.
c. Discovers that supplementary information required by FASB has been omitted .
d. Believes that there is a probable likelihood of a material loss resulting from an uncertainty that is
sufficiently supported and disclosed.

Choice "d" is correct. An auditor most likely would express an unqualified opinion and would not add
explanatory language to the report if the auditor believes that there is a probable likelihood of a material loss
resulting from an uncertainty that is sufficiently supported and disclosed.

Under which of the following circumstances would a disclaimer of opinion not be appropriate?
a. The auditor is unable to determine the amounts associated with an employee fraud scheme.
b. Management does not provide reasonable justification for a change in accounting principles.
c. The client refuses to permit the auditor to confirm certain accounts receivable or apply alternative
procedures to verify their balances.
d. The chief executive officer is unwilling to sign the management representation letter.

Choice "b" is correct. A disclaimer of opinion means that the auditor was unable to obtain sufficient
appropriate audit evidence to provide a reasonable basis for an opinion , thus, NO opinion is expressed. An
unjustified accounting change is a GAAP departure that may result in a qualified or adverse opinion, not a
disclaimer.

Which of the following phrases would an auditor most likely include in the auditor's report when expressing a
qualified opinion because of inadequate disclosure?
a. Subject to the departure from generally accepted accounting principles, as described above.
b. With the foregoing explanation of these omitted disclosures.
c. Except for the omission of the information discussed in the preceding paragraph.
d. Does not present fairly in all material respects.

Choice "c" is correct. The only phrase acceptable in a qualified opinion is "except for." In the presence of
inadequate disclosure, the auditor's opinion would state "In our opinion, except for the omission of the
information discussed in the preceding paragraph, ... "

Kane, CPA, concludes that there is substantial doubt about Lima Co.'s ability to continue as a going concern
for a reasonable period of time. If Lima's financial statements adequately disclose its financial difficulties,
Kane's auditor's report is required to include an explanatory paragraph that specifically uses the phrase(s):
1. "possible discontinuance
of operations"
2. Reasonable period of time, not to exceed one year"

If, after considering identified conditions and events and management's plans, the
auditor concludes that substantial doubt about the entity's ability to continue as a going concern for a
reasonable period of time remains, the audit report should include an explanatory paragraph (following the
opinion paragraph) to reflect that conclusion. This conclusion should be expressed through the use of the
phrase "substantial doubt about its (the entity's) ability to continue as a going concern" [or similar wording that
includes the terms "substantial doubt" and "going concern"]. The "reasonable period ... not to exceed one
year" is inherent in the definition of going concern under U.S. auditing standards and is not explicitly stated in
the audit report. The phrase "possible discontinuation of operations" may be included in the going concern
disclosure but is not specifically required.

Mead, CPA, had substantial doubt about Tech Co.'s ability to continue as a going concern when reporting on
Tech's audited financial statements for the year ended June 30, 19X4. That doubt has been removed in
19X5. What is Mead's reporting responsibility if Tech is presenting its financial statements for the year ended
June 30, 19X5, on a comparative basis with those of 19X4?

Choice "a" is correct. If substantial doubt about the entity's ability to continue as a going concern has been
removed in the current period , the explanatory paragraph included in the prior period auditor's report should
not be repeated , and no description of the reasons or plans for recovery need be included.

An auditor concludes that a client's illegal act, which has a material effect on the financial statements, has not
been properly accounted for or disclosed. Depending on the materiality of the effect on the financial
statements, the auditor should express either a(an):
a. Adverse opinion or a disclaimer of opinion.
b. Qualified opinion or an adverse opinion.
c. Disclaimer of opinion or an unqualified opinion with a separate explanatory paragraph.
d. Unqualified opinion with a separate explanatory paragraph or a qualified opinion.

Choice "b" is correct. If the financial statements, including accompanying notes, fail to disclose information
that is required by generally accepted accounting principles, the auditor should express a qualified or adverse
opinion.

When an independent CPA assists in preparing the financial statements of a publicly held entity, but has not
audited or reviewed them, the CPA should issue a disclaimer of opinion. In such situations, the CPA has no
responsibility to apply any procedures beyond :
a. Documenting that internal control is not being relied on.
b. Reading the financial statements for obvious material misstatements.
c. Ascertaining whether the financial statements are in conformity with GAAP.
d. Determining whether management has elected to omit substantially all required disclosures.

Choice "b" is correct. The accountant is only required to read the financial statements for obvious material
misstatements.

When there has been a change in accounting principles, but the effect of the change on the comparability of
the financial statements is not material, the auditor should:
a. Refer to the change in an explanatory paragraph .
b. Explicitly concur that the change is preferred .
c. Not refer to consistency in the auditor's report.
d. Refer to the change in the opinion paragraph.

Choice "c" is correct. If an accounting change has no material effect on the comparability of the financial
statements, the auditor does not need to recognize the change in the current year's audit report.

Park, CPA, was engaged to audit the financial statements of Tech Co. , a new client, for the year ended
December 31, 20X3. Park obtained sufficient audit evidence for all of Tech's financial statement items except
Tech's opening inventory. Due to inadequate financial records, Park could not verify Tech's January 1, 20X3,
inventory balances. Park's opinion on Tech's 20X3 financial statements most likely will be:
Balance sheet Income statement

Choice "b" is correct. When the auditor is unable to satisfy himself or herself regarding the amount of
beginning inventory, he or she must disclaim an opinion on the income statement because of the inability to
verify the cost of goods sold during the year. The auditor may, however, still be able to issue an unqualified
opinion on the balance sheet, since inventory can be verified as of the balance sheet date.

Which paragraphs of an auditor's standard report on financial statements under U.S. auditing standards
should refer to generally accepted auditing standards (GAAS) and generally accepted accounting principles
(GAAP)?
GAAS? GAAP?

Under U.S. auditing standards, the auditor states that the audit was conducted in
accordance with GAAS in the scope paragraph. The auditor expresses an opinion on the financial
statements' conformity with GAAP in the opinion paragraph.

Management believes and the auditor is satisfied that a material loss probably will occur when pending
litigation is resolved . Management is unable to make a reasonable estimate of the amount or range of the
potential loss, but fully discloses the situation in the notes to the financial statements. If management does
not make an accrual in the financial statements, the auditor should express a(an):
a. Qualified opinion due to a scope limitation.
b. Qualified opinion due to a departure from GAAP.
c. Unqualified opinion with an explanatory paragraph.
d. Unqualified opinion in a standard auditor's report.

Choice "d" is correct. If a contingent liability is probable, but not estimable, and it is disclosed in the footnotes,
the auditor issues an unqualified audit report without an explanatory paragraph.

In which of the following circumstances would an auditor be most likely to express an adverse opinion?
a. The chief executive officer refuses the auditor access to minutes of board of directors' meetings.
b. Tests of controls show that the entity's internal control is so poor that it cannot be relied upon.
c. The financial statements are not in conformity with the GAAP rules regarding the capitalization of leases.
d. Information comes to the auditor's attention that raises substantial doubt about the entity's ability to
continue as a going concern.

Choice "c" is correct. An adverse opinion is issued when the financial statements are not presented in
accordance with GAAP.

When disclaiming an opinion due to a client-imposed scope limitation , an auditor should indicate in a separate
paragraph why the audit did not comply with generally accepted auditing standards. The auditor should also omit the:
1) Scope Paragraph
2( Opinion Paragraph

1) Yes
2) No
When disclaiming an opinion because of scope limitations, the auditor should indicate
in a separate paragraph(s) the reasons that the audit did not comply with GAAS. The auditor should also omit
the scope paragraph. The opinion paragraph is not omitted; however it indicates that no opinion is
expressed.

An auditor decides to issue a qualified opinion on an entity's financial statements because a major
inadequacy in its computerized 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 on the financial statements.
d. Inadequate disclosure of necessary information.

Choice "c" is correct. When an auditor qualifies his opinion because of a scope limitation , the wording in the
opinion paragraph should indicate that the qualification pertains to the possible effects on the financial
statements and not to the scope limitation itself.

When an entity changes its method of accounting for income taxes, which has a material effect on
comparability, the auditor should refer to the change in an explanatory paragraph added to the auditor's
report. This paragraph should identify the nature of the change and:
a. Explain why the change is justified under generally accepted accounting principles.
b. Describe the cumulative effect of the change on the audited financial statements.
c. State the auditor's explicit concurrence with or opposition to the change.
d. Refer to the financial statement note that discusses the change in detail.

Choice "d" is correct. The paragraph should refer to the note in the financial statements that discusses the
change in detail. Following is an example of an appropriate explanatory paragraph: "As discussed in Note X
to the financial statements, the company changed its method of accounting for income taxes in X2."

A limitation on the scope of an audit sufficient to preclude an unqualified opinion will usually result when
management:
a. Is unable to obtain audited financial statements supporting the entity's investment in a foreign subsidiary.
b. Refuses to disclose in the notes to the financial statements related party transactions authorized by the
Board of Directors.
c. Does not provide the auditor with an engagement letter specifying the responsibilities of both the entity
and the auditor.
d. Fails to correct a significant deficiency in internal control communicated to those charged with governance
after the prior year's audit.

Choice "a" is correct. Restrictions on the scope of the audit, such as the timing of the work, the inability to
obtain sufficient appropriate audit evidence, or an inadequacy in the accounting records , may require the
auditor to qualify or disclaim an opinion. Inability to obtain audited financial statements supporting the entity's
investment in a foreign subsidiary is such a restriction on the scope of the audit.

In which of the following situations would an auditor ordinarily choose between expressing an "except for"
qualified opinion or an adverse opinion?
a. The auditor did not observe the entity's physical inventory and is unable to become satisfied as to its
balance by other auditing procedures.
b. The financial statements fail to disclose information that is required by generally accepted accounting
principles.
c. The auditor is asked to report only on the entity's balance sheet and not on the other basic financial
statements.
d. Events disclosed in the financial statements cause the auditor to have substantial doubt about the entity's
ability to continue as a going concern.

Choice "b" is correct. Failure to disclose information that is required by GAAP is a departure from GAAP.
Departures from GAAP result in a qualified or an adverse opinion.

When an auditor expresses an adverse opinion, the opinion paragraph should include:
a. The principal effects of the departure from generally accepted accounting principles.
b. A direct reference to a separate paragraph disclosing the basis for the opinion.
c. The substantive reasons for the financial statements being misleading.
d. A description of the uncertainty or scope limitation that prevents an unqualified opinion.

Choice "b" is correct. The opinion paragraph in an adverse opinion reads, "in our opinion, because of the
effects of the matters discussed in the preceding paragraphs, the financial statements .... "

An auditor may reasonably issue an "except for" qualified opinion for a(an):
1. scope limitation
2. unjustified accounting change

1. yes
2. yes

How does an auditor make the following representations when issuing the standard auditor's report on
comparative financial statements under U.S. auditing standards?
answer (implicit) or (explicit)
1. examination of evidence on a test basis
2. consistent application of accounting principles

Explicitly - Implicitly
Under U.S. auditing standards, the auditor explicitly states in the scope paragraph of his opinion: "an audit
includes examining, on a test basis, evidence supporting ... "
Consistency is implied in the auditor's standard report.

In which of the following situations would an auditor ordinarily issue an unqualified audit opinion without an
explanatory paragraph?
a. The auditor wishes to emphasize that the entity had significant related party transactions.
b. The auditor decides to make reference 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.

Choice "b" is correct. An auditor would generally issue an unqualified audit opinion without an explanatory
paragraph when the auditor decides to make reference to the report of another auditor as a basis, in part, for
the auditor's opinion. The auditor would modify his/her report (all three paragraphs), but would not add an
explanatory paragraph .

When there has been a change in accounting principle that materially affects the comparability of the
comparative financial statements presented and the auditor concurs with the change, the auditor should:
1. concur explicitly with the change
2. issue an "except for" qualified opinion
3. refer to the change in an explanatory paragraph

No - No - Yes.
When a change in accounting principle materially affects the comparability of the comparative FS , the auditor
should refer to the change in an explanatory paragraph following the unqualified opinion paragraph .

The auditor's concurrence with a change in GAAP is implicit, not explicit.

When a qualified opinion results from a limitation on the scope of the audit, the situation should be described
in an explanatory paragraph:
a. Preceding the opinion paragraph and referred to only in the scope paragraph of the auditor's report.
b. Following the opinion paragraph and referred to in both the scope and opinion paragraphs of the auditor's
report.
c. Following the opinion paragraph and referred to only in the scope paragraph of the auditor's report.
d. Preceding the opinion paragraph and referred to in both the scope and opinion paragraphs of the
auditor's report.

Choice "d" is correct. When a qualified opinion results from a limitation of scope, it should be described in an
explanatory paragraph preceding the opinion paragraph and referred to in both the scope and opinion
paragraphs of the auditor's report.

Restrictions imposed by a client prohibit the observation of physical inventories, which account for 35% of all
assets. Alternative audit procedures cannot be applied, although the auditor was able to examine satisfactory
evidence for all other items in the financial statements. The auditor should issue a(an):
a. "Except for" qualified opinion.
b. Disclaimer of opinion.
c. Unqualified opinion with a separate explanatory paragraph.
d. Unqualified opinion with an explanation in the scope paragraph.

Choice "b" is correct. Restrictions of scope imposed on the audit of such a large (35%) asset would require a
disclaimer of opinion.

An auditor concludes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. If the entity's disclosures concerning this matter are adequate, the audit report
may include a(an):
1) Disclaimer of opinion
2) Except for opinion

1. yes
2. no
If an auditor concludes that there is substantial doubt about an entity's ability to continue as a going concern
and that the entity's disclosures are adequate, then the audit report may be either:
Unqualified with explanatory paragraph , or
Disclaimed.
(Generally, an unqualified opinion is issued , but the auditor is not prohibited from choosing to issue a
disclaimer.)

An auditor should disclose the substantive reasons for expressing an adverse opinion in an explanatory
paragraph:
a. Preceding the scope paragraph.
b. Preceding the opinion paragraph.
c. Following the opinion paragraph.
d. Within the notes to the financial statements.

Choice "b" is correct. The auditor should disclose the substantive reasons for expressing an adverse opinion
in a separate explanatory paragraph preceding the opinion paragraph.

When management does not provide reasonable justification that a change in accounting principle is
preferable and it presents comparative financial statements, the auditor should express a qualified opinion:
a. Only in the year of the accounting principle change.
b. Each year that the financial statements initially reflecting the change are presented.
c. Each year until management changes back to the accounting principle formerly used.
d. Only if the change is to an accounting principle that is not generally accepted.

Choice "b" is correct. When management does not provide reasonable justification that a change in
accounting principle is preferable and it presents comparative FS, the auditor should express a qualified
opinion each year that the FS initially reflecting the change are presented.

According to the profession's ethical standards, which of the following events may justify a departure from a
Statement of Financial Accounting Standards?
1) new legislation
2) evolution of a new form of business transaction.

Yes - Yes. Rule 203 of the code of professional conduct of the AICPA states that if the
financial statements or data contain a GAAP departure, the departure may be justified if the CPA can
demonstrate that due to unusual circumstances, such as new legislation or the evolution of a new form of
business transaction, the FS would otherwise be misleading.
Under these circumstances, the auditor's report should describe the departure, its approximate effects, if
practicable, and the reasons why compliance with the generally accepted principle would result in a
misleading statement.

Which of the following audit procedures most likely would 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. Reading the minutes of meetings of the stockholders and the board of directors.
b. Comparing the market value of property to amounts owed on the property.
c. Reviewing lease agreements to determine whether leased assets should be capitalized.
d. Inspecting title documents to verify whether any assets are pledged as collateral.

Choice "a" is correct. The auditor should examine any evidence that appears contrary to the basic principle of
going concern. Reviewing the minutes from stockholder and board of director meetings is one procedure that
is used in this regard .

A CPA's standard report on audited financial statements under U.S. auditing standards would be
inappropriate if it referred to:
a. Management's responsibility for the financial statements.
b. An assessment of the entity's accounting principles.
c. Significant estimates made by management.
d. The CPA's assessment of sampling risk factors

Choice "d" is correct. The CPA's standard report on audited financial statements does not include matters
related to the auditor's assessment of specific risk factors.

Which of the following is true regarding the standard audit report for an issuer?
a. Reference should be made in the scope paragraph to both PCAOB standards and generally accepted
auditing standards.
b. PCAOB standards should not be mentioned at all, although their use is implied in the standard auditor's
report.
c. Reference should be made in the scope paragraph to PCAOB standards, and in the opinion paragraph to
generally accepted accounting principles.
d. Reference may be made in the scope paragraph to either PCAOB standards or generally accepted
auditing standards.

Choice "c" is correct. An auditor reporting on the audit of financial statements of an issuer should indicate in
the scope paragraph that the engagement was conducted in accordance with PCAOB standards, and should
refer to GAAP in the opinion paragraph.

Under which of the following circumstances would an auditor's expression of an unqualified opinion be
inappropriate?
a. The auditor is unable to obtain the audited financial statements of a significant subsidiary.
b. The financial statements are prepared on the entity's income tax basis.
c. There are significant deficiencies in the design and operation of the entity's internal control.
d. Analytical procedures indicate that many year-end account balances are not comparable with the prior
year's balances.

Choice "a" is correct. If the auditor is unable to obtain the audited financial statements of a significant
subsidiary, a scope limitation exists. Assuming the effect is material , the auditor would issue either a qualified
opinion or a disclaimer of opinion.

A CPA concludes that the unaudited financial statements on which the CPA is disclaiming an opinion are not
in conformity with generally accepted accounting principles (GAAP) because management has failed to
capitalize leases. The CPA suggests appropriate revisions to the financial statements, but management
refuses to accept the CPA's suggestions. Under these circumstances, the CPA ordinarily would:
a. Express limited assurance that no other material modifications should be made to the financial
statements.
b. Restrict the distribution of the CPA's report to management and the entity's board of directors.
c. Issue a qualified opinion or adverse opinion depending on the materiality of the departure from GAAP.
d. Describe the nature of the departure from GAAP in the CPA's report and state the effects on the financial
statements, if practicable.

Choice "d" is correct. If the client refuses to accept the CPA's suggestions, the CPA should add a paragraph
modifying the disclaimer to describe, in a separate explanatory paragraph, the nature and effect of the
departure from GAAP.

A client decides not to make an auditor's proposed adjustments that collectively are not material, and wants
the auditor to issue the report based on the unadjusted numbers. Which of the following statements is correct
regarding the financial statement presentation?
a. The financial statements are free from material misstatement, and no disclosure is required in the notes to
the financial statements.
b. The financial statements do not conform with generally accepted accounting principles (GAAP).
c. The financial statements contain unadjusted misstatements that should result in a qualified opinion.
d. The financial statements are free from material misstatement, but disclosure of the proposed adjustments
is required in the notes to the financial statements.

Choice "a" is correct. An unqualified opinion states that the financial statements are presented fairly, in all
material respects. Since the collective effect of the proposed adjustments is immaterial , an unqualified
opinion without modification should be expressed. In addition, footnote disclosure of proposed immaterial
adjustments is not required.

Which of the following statements is found in the unqualified financial statement audit opinion under both U.S.
auditing standards and International Standards on Auditing?
a. Management is responsible for the preparation and fair presentation of these financial statements.
b. Our responsibility is to express an opinion on these financial statements based on our audit.
c. Management is responsible for such internal control as management determines is necessary to enable
the preparation of financial statements that are free from material misstatement, whether due to fraud or
error.
d. Those standards require that we comply with ethical requirements.

Choice "b" is correct. This statement of auditor responsibility is included in the unqualified opinion under both
U.S. auditing standards and International Standard on Auditing.

Which of the following statements is not true regarding the auditor's responsibility for subsequent events?
a. The auditor has an active responsibility to make continuing inquiries between the date of the auditor's
report and the date on which the report is submitted.
b. The auditor has an active responsibility to make continuing inquiries between the date of the financial
statements and the date of the auditor's report.
c. The auditor has an active responsibility to make continuing inquiries between the date of the financial
statements and the date on which sufficient appropriate audit evidence has been obtained.
d. The auditor has no active responsibility to make continuing inquiries after the date of the auditor's report.

Choice "a" is correct. The auditor has no active responsibility to make continuing inquiries between the date
of the auditor's report and the date on which the report is submitted. The auditor's active responsibility stops
on the date of the auditor's report.

Which of the following events occurring after the issuance of an auditor's report most likely would cause the
auditor to make further inquiries about the previously issued financial statements?
a. An uninsured natural disaster occurs that may affect the entity's ability to continue as a going concern.
b. A contingency is resolved that had been disclosed in the audited financial statements.
c. New information is discovered concerning undisclosed lease transactions of the audited period.
d. A subsidiary is sold that accounts for 25% of the entity's consolidated net

Choice "c" is correct. The question addresses the subsequent discovery of facts that may have existed at the
balance sheet date. Such events will often require an adjustment to the financial statements. An example is
new information discovered about undisclosed lease transactions of the audited period. As a result, the
auditor should make further inquiry to determine whether the information is reliable and whether the facts
existed at the date of the report.

Which of the following events occurring after the issuance of an auditor's report most likely would cause the
auditor to make further inquiries about the previously issued financial statements?
a. A technological development that could affect the entity's future ability to continue as a going concern.
b. The discovery of information regarding a contingency that existed before the financial statements were
issued .
c. The entity's sale of a subsidiary that accounts for 30% of the entity's consolidated sales.
d. The final resolution of a lawsuit explained in a separate paragraph of the auditor's report.

Choice "b" is correct. With respect to events occurring after the issuance of an auditor's report, the auditor is
only responsible for information that existed at the audit report date.

Wilson , CPA, obtained sufficient appropriate audit evidence to render an opinion on Abco's December 31 ,
Year 1, financial statements on March 6, Year 2. A subsequent event requiring adjustment to the Year 1
financial statements occurred on April 10, Year 2, and came to Wilson's attention on April 24, Year 2. If the
adjustment is made without disclosure of the event, Wilson's report ordinarily should be dated:
a. March 6, Year 2.
b. April 10, Year 2.
c. April 24, Year 2.
d. Using dual dating.

Choice "a" is correct. Since the financial statements were adjusted without disclosure of the event in the
footnotes , Wilson's report should be dated as of March 6, Year 2, the date on which sufficient appropriate
audit evidence was obtained.

An auditor concludes that a substantive auditing procedure considered necessary during the prior period's
audit was omitted . Which of the following factors would most likely cause the auditor promptly to apply the
omitted procedure?
a. There are no alternative procedures available to provide the same evidence as the omitted procedure.
b. The omission of the procedure impairs the auditor's present ability to support the previously expressed
opinion.
c. The source documents needed to perform the omitted procedure are still available.
d. The auditor's opinion on the prior period's financial statements was unqualified.

Choice "b" is correct. The factor most likely to cause the auditor to promptly apply the omitted procedure
would be if the omission impairs the auditor's present ability to support the previously expressed opinion.

After issuing a report, an auditor has no obligation to make continuing inquiries or perform other procedures
concerning the audited financial statements, unless:
a. Information, which existed at the report date and may affect the report, comes to the auditor's attention.
b. Management of the entity requests the auditor to reissue the auditor's report.
c. Information about an event that occurred after the date of the auditor's report comes to the auditor's
attention.
d. Final determinations or resolutions are made of contingencies that had been disclosed in the financial
statements.

Choice "a" is correct. After issuing a report, an auditor has no obligation to make continuing inquiries or
perform other procedures concerning the audited financial statements, unless information, which existed at
the report date and may affect the report, comes to the auditor's attention. In this case the auditor would
perform procedures to determine if the information affects the report and is important to the external users.

Which of the following procedures would an auditor most likely perform prior to the balance sheet date?
a. Review subsequent events.
b. Perform search for unrecorded liabilities.
c. Send inquiry letter to client's legal counsel.
d. Review detail and test significant travel and entertainment expenses.

Choice "d" is correct. The auditor may choose to perform detailed audit work during an interim period prior to
the balance sheet date, especially for accounts that are reasonably predictable. If travel and entertainment
expenses are budgeted and closely monitored, they may very well be predictable and subject to interim
testing.

Which of the following procedures would an auditor most likely perform in obtaining evidence about
subsequent events?
a. Examine changes in the quoted market prices of investments purchased since the year-end.
b. Compare the latest available interim financial information with the financial statements being reported
upon.
c. Apply analytical procedures to the details of the balance sheet accounts that were tested at interim dates.
d. Inquire about payroll checks that were recorded before the year-end but cashed after the year-end.

Choice "b" is correct. In obtaining evidence about subsequent events, the auditor should examine the latest
available interim financial statements, and compare them with the financial statements under audit.

In connection with a proposal to obtain a new audit client, a CPA in public practice is asked to prepare a
report on the application of accounting principles to a specific transaction. The CPA's report should include a
statement that:
a. The engagement was performed in accordance with Statements on Standards for Accounting and Review
Services.
b. Responsibility for the proper accounting treatment rests with the pre parers of the financial statements.
c. The evaluation of the application of accounting principles is hypothetical and may not be used for opinionshopping.
d. The guidance is provided for management's use only and may not be communicated to the prior or
continuing auditor.

Choice "b" is correct. When reporting on the application of accounting principles to a specific transaction, the
CPA should include in his or her report a statement that the preparers of the financial statements, who should
consult with their continuing accountants, bear the ultimate responsibility for proper accounting treatment.

Blue, CPA, has been asked to render an opinion on the application of accounting principles to a specific
transaction by an entity that is audited by another CPA. Blue may accept this engagement, but should:
a. Consult with the continuing CPA to obtain information relevant to the transaction.
b. Report the engagement's findings to the entity's audit committee, the continuing CPA, and management.
c. Disclaim any opinion that the hypothetical application of accounting principles conforms with generally
accepted accounting principles.
d. Notify the entity that the report is for the general use of all interested parties.

Choice "a" is correct. When rendering an opinion on the application of accounting principles to a specific
transaction , the reporting CPA should consult with the continuing CPA to obtain information relevant to the
transaction .

An auditor may report on condensed financial statements that are derived from financial
statements that he or she has audited , indicating

(1) that he or she has audited and expressed an opinion onthe complete financial statements,
(2) the date of the auditor's report,
(3) the type of opinion expressed, and
(4) that the information contained in the condensed financial statements is fairly stated in all material respects
in relation to the complete financial statements from which it has been derived.

The auditor's report on condensed statements derived from audited statements should
indicate

(1) that the CPA audited and expressed an opinion on the complete financial statements, (2) the date
of the auditor's report on the complete financial statements,
(3) the type of opinion expressed, and
(4)whether, in the auditor's opinion, the information set forth in the condensed financial statements is fairly stated
in all material respects in relation to the complete financial statements from which it was derived

What is an auditor's responsibility for supplementary information which is outside the basic financial
statements, but required by the FASB?
a. The auditor has no responsibility for required supplementary information as long as it is outside the basic
financial statements.
b. The auditor's only responsibility for required supplementary information is to determine that such
information has not been omitted.
c. The auditor should apply certain limited procedures to the required supplementary information, and add
an explanatory paragraph to the financial statement audit report.
d. The auditor should apply tests of details of transactions and balances to the required supplementary
information , and report any material misstatements in such information .

Choice "c" is correct. For additional supplementary information required by the FASB, the auditor should
apply certain limited procedures to the information and add an explanatory paragraph to the financial
statement audit report.

Which of the following reports may be issued only by an accountant who is independent of a client?
a. standard report on an examination of a financial forecast
b. report on consulting services
c. compilation report on historical financial statements
d. compilation report on a financial projection.

a. the accountant must be indp to issue a standard reprot on an examination of a financial forecast.

Which of the following areas of professional responsibility should be observed by a cpa not in the public practice
1. objectivity
2. independence

a cpa must always be objective, however a cpa need not be independent except when engaged in public practice

SOX restrict former members of an audit engagement team from accepting employment as a cfo/ceo/cao or controller of an audid client that files with sec. How many audit periods must be completed before such employent can be accepted.

To impose a disincentive to fraud an auidt team member may not accpet employment as cdo/cfo/....for one year

Which of teh following services do not need to be preapproved by the audit committee of an issuer?
a. tax services
b. non-audit services that are less than 5percent of total revenues from teh audit client.
c. services provided by the auditor on a recurring basis
d. non-audit services related to internal control over financial reporting

B. as long as the services are brought to the audit committee's attention and approved before the completion of the audit.

the aduitor of an issuer may provide which of the following tax services
a. services related to confidential tax transactions.
b. tax services for officer of the issuer
c. tax services for immediate family members of corp officers
d. tax planning services

d is correct. permitted tax services includ tax compliance, tax planning and tax advice. teh pcaob prohibts tax services related to confidential or aggressive tax transactions and tax services to corp officers of audit clients or immediate family members of coporate offciers.

which of the following impairs independence under us ethics standards but does not necessarily impair indpeendence under ifac code of etics for professional accountants
a. an immaterial direct financial interest in an audit client
b. employment at a client of an immediate family member of the engagment partner in a key accounting postion
c. the auditor alos provdes internal audit outsourcing services
d. contingent fee arrangments for audit engagments .

c. under ifac code of ethics, an auditor may provide internal audit services if appropriate safegaurds are put in place to limit or eliminate any threats to independence. internal audit outsourcing services may not be provided to audit clients under US ethics standards.

How many audits of public companies per year does a cpa firm that registered with the PCAOB have to perform before it receives an annual inspection from teh pcaob?

100 audits

Pell , CPA, decides to serve as principal auditor in the audit of the financial statements of Tech Consolidated , Inc. Smith, CPA, audits one of Tech's subsidiaries. In which situation(s) should Pell make reference to Smith's audit?
I. Pell reviews Smith's audit documentation and assumes responsibility for Smith's work, but expresses a qualified opinion on Tech's financial statements.
II. Pell is unable to review Smith's audit documentation ; however, Pell's inquiries indicate that Smith has an
excellent reputation for professional competence and integrity.

Choice "b" is correct. II only. If Pell is unable to review Smith's audit documentation, but inquiries indicate
that Smith has an excellent reputation for professional competence and integrity, Pell should divide
responsibility by making reference to Smith's audit.

Which of the following best describes what is meant by the term generally accepted auditing standards?
a. Rules acknowledged by the accounting profession because of their universal application.
b. Pronouncements issued by the Auditing Standards Board.
c. Measures of the quality of the auditor's performance.
d. Procedures to be used to gather evidence to support financial statements.

Choice "c" is correct. Generally accepted auditing standards ("GAAS") are measures of the quality of the
auditor's performance.

For an entity that does not receive governmental financial assistance, an auditor's standard report on
financial statements generally would not refer to:
a. Significant estimates made by management.
b. An assessment of the entity's accounting principles.
c. Management's responsibility for the financial statements.
d. The entity's internal control.

Choice "d" is correct. The auditor's standard report generally does not make reference to the entity's internal
control. Note that for an entity that does receive governmental financial assistance, a written report on
internal control is required. Also, note that an auditor may (but is not required to) expand his or her audit
report to clarify that a GAAS audit does not require the level of testing and reporting on internal control that is
required for issuers.

Which of the following procedures should an auditor generally perform regarding subsequent events?
a. Compare the latest available interim financial statements with the financial statements being audited.
b. Send second requests to the client's customers who failed to respond to initial accounts receivable
confirmation requests.
c. Communicate material weaknesses in the internal control structure to those charged with governance.
d. Review the cut-off bank statements for several months after the year-end.

Choice "a" is correct. When performing procedures regarding subsequent events, the auditor generally will
compare the latest available interim financial statements with the financial statements being audited to
determine if any significant subsequent event occurred that would need to be reflected in the statements
being audited.

Which of the following phrases should be included in the opinion paragraph when an auditor expresses a qualified opinion?
1. "when read in conjunction with not x"
2. "with the foregoing explanation"

No - No.
A qualified opinion phrase is, "in our opinion, except for [explanation of problem] as discussed in the
preceding paragraph ... "
Choice "a" is incorrect, as "when

An auditor's responsibility to express an opinion on the financial statements under U.S. auditing standards is:
a. Implicitly represented in the auditor's standard report.
b. Explicitly represented in the opening paragraph of the auditor's standard report.
c. Explicitly represented in the scope paragraph of the auditor's standard report.
d. Explicitly represented in the opinion paragraph of the auditor's standard report.

Choice "b" is correct. The auditor's responsibility to express an opinion on the financial statements under
U.S. auditing standards is explicitly represented in the last sentence of the opening paragraph: "Our
responsibility is to express an opinion on these financial statements based on our audit."

When an auditor qualifies an opinion because of the inability to confirm accounts receivable by direct
communication with debtors, the wording of the opinion paragraph of the auditor's report should indicate that
the qualification pertains to the:
a. Limitation on the auditor's scope.
b. Possible effects on the financial statements.
c. Lack of sufficient appropriate audit evidence.
d. Departure from generally accepted auditing standards.

Choice "b" is correct. When an auditor qualifies his or her opinion because of a scope limitation , such as the
inability to confirm AIR, the wording in the opinion paragraph should indicate that the qualification pertains to
the possible effects on the FS and not to the scope limitation itself.

"In our opinion, with the foregoing
explanation, the financial statements referred to above present fairly .... " This is considered an:

Example of inappropriate reporting.
"In our opinion , with the foregoing explanation, the FS referred to above present fairly"
is an example of inappropriate reporting. When an auditor's report refers to the use of an accounting principle
at variance with GAAP, the words, "in our opinion, except for the effects of the matters discussed in the
preceding paragraph, the FS referred to above present fairly, ... " should be used.

Does an auditor make the following representations explicitly or implicitly when issuing the standard auditor's
report on comparative financial statements?
1. Consistent application of acct principles
2. examination of evidence on a test basis

Implicitly - Explicitly.
When issuing the standard auditor's report on comparative FS, an auditor implicitly represents consistent
application of GAAP, but explicitly states, "An audit includes examining, on a test basis, evidence supporting.
"
(Again , it is essential that you memorize the "auditor's standard report.")

An auditor may issue a qualified opinion under which of the following circumstances?
1. lack of sufficient appropriate audit evidence
2. restrictions on the scope of the audit

Yes - Yes.
An auditor may issue a qualified opinion (or a disclaimer, depending on materiality) when there is a lack of
sufficient appropriate audit evidence, or when there are restrictions on the scope of the audit.

How are management's responsibility and the auditor's responsibility represented in the standard auditor's
report? implicit/explicit
1. Managements responsibility
2. auditors responsibility

Choice "a" is correct. The responsibility of the auditor and the responsibility of management are stated
explicitly in the introductory paragraph of the standard auditor's report.

Information accompanying the basic financial statements in an auditor-submitted document should not
include:
a. An analysis of inventory by location.
b. A statement that the allowance for doubtful accounts is adequate.
c. A statement that the depreciable life of a new asset is 20 years.
d. An analysis of revenue by product line.

Choice "b" is correct. A statement that the "allowance for doubtful accounts is adequate" is generally not
included in information accompanying the basic FS in an auditor-submitted document (ASD) because it
expresses an opinion rather than providing details or explanations.

To exercise due professional care an auditor should:
a. Critically review the judgment exercised by those assisting in the audit.
b. Examine all available corroborating evidence supporting management's assertions.
c. Design the audit to detect all instances of illegal acts.
d. Attain the proper balance of professional experience and formal education.

Choice "a" is correct. To exercise due professional care, an auditor should critically review the judgment
exercised by those assisting in the audit.

An entity issues financial statements that present financial position and results of operations but omits the
related statement of cash flows. Management discloses in the notes to the financial statements that it does
not believe the statement of cash flows to be a useful financial statement.

An "except for" qualified opinionFailure to include a statement of cash flows is a GAAP violation that
requires an "except for" qualified opinion to be issued.

An entity discloses in the notes to the financial statements certain lease obligations. The auditor believes that
the failure to capitalize these leases is a departure from generally accepted accounting principles.

E. Either an "except for" qualified opinion or an adverse opinion
This is a GAAP departure. Either an "except for" qualified opinion (if the
item is material) or an adverse opinion (if the item is very material) should be issued.

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