Audit CPA Exam 3 Gleim

Because an expression of opinion as to certain identified items in financial statements tends to overshadow or contradict a disclaimer of opinion or adverse opinion, it is inappropriate for an auditor to express

A piecemeal opinion.

In which of the following situations would an auditor ordinarily choose between expressing a qualified opinion and an adverse opinion?

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

Which of the following procedures would an auditor most likely perform in obtaining evidence about subsequent events?

Compare the latest subsequent interim financial information with the financial statements being reported upon.

An auditor most likely would review an entity's periodic accounting for the numerical sequence of shipping documents and invoices to support management's financial statement assertion of

Completeness.

When an auditor concludes that substantial doubt exists about an entity's ability to continue as a going concern for a reasonable period of time, the auditor's responsibility is to

Consider the adequacy of disclosure about the entity's possible inability to continue as a going concern.

If deemed necessary, the auditor should request that an audit client send a letter of inquiry to those attorneys who have been consulted regarding litigation, claims, or assessments. The primary reason for this request is to provide

Corroborative evidence.

Which of the following procedures would an auditor most likely perform in obtaining evidence about subsequent events?

Inquire of management whether new shares have been issued since the year end.

Which of the following parts of the auditor's report on the financial statements of a nonissuer are changed when an adverse opinion is expressed?

Introductory Paragraph NO Auditor's Responsibility Section YES Opinion Paragraph YES

Legal counsel's response to an auditor's inquiry about litigation, claims, and assessments may be limited to matters that are considered individually or collectively material to the client's financial statements. Which parties may reach an understanding on the limits of materiality for this purpose that are stated in the letter of inquiry?

The auditor and the client's management.

In which of the following circumstances would an auditor of a nonissuer most likely add an emphasis-of-matter paragraph to the auditor's report while expressing an unmodified opinion?

There is substantial doubt about the entity's ability to continue as a going concern.

An emphasis-of-matter paragraph is used in the auditor's report to draw users' attention to

A matter appropriately presented or disclosed in the financial statements.

An auditor expresses an adverse opinion if

A misstatement is material and pervasive.

The auditor's report on the audited financial statements of a nonissuer must include an emphasis-of-matter paragraph if

A material change in an accounting principle occurs.

If the objective of a test of details is to detect overstatements of sales, the auditor should compare transactions in the

Accounting records with the source documents.

If management of a nonissuer fails to justify a material change in accounting principle, the auditor should

Add a basis for modified opinion paragraph to the report and express a qualified or an adverse opinion.

An auditor's tests of controls for completeness of the revenue cycle usually include determining whether

An invoice is prepared for each shipping document.

The auditor's responsibility section of an auditor's report of a nonissuer contains the following: "We did not audit the financial statements of EZ, Inc., a wholly owned subsidiary, which statements reflect total assets and revenues constituting 27% and 29%, respectively, of the related consolidated totals. Those statements were audited by other auditors, whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for EZ, Inc., is based solely on the report of the other auditors." These sentences

Assume no responsibility for the audit of the component auditor.

When qualifying an opinion because of an insufficiency of appropriate audit evidence, an auditor of a nonissuer client should refer to the situation in the

Auditor's Responsibility Section YES Notes to the Financial Statements NO

Subsequent events are defined as events that occur subsequent to the

Balance sheet date but prior to the auditor's report date.

In the first audit of a client, an auditor was not able to gather sufficient appropriate audit evidence about the consistent application of accounting principles between the current and the prior year, as well as the amounts of assets or liabilities at the beginning of the current year. This was due to the client's record retention policies. If the amounts in question could materially affect current operating results, the auditor most likely would

Be unable to express an opinion on the current year's results of operations and cash flows.

Which of the following conditions or events is most likely to cause an auditor to have substantial doubt about an entity's ability to continue as a going concern?

Cash flows from operating activities are negative.

Which of the following sets of information does an auditor usually confirm on one form?

Cash in bank and collateral for loans.

An auditor using a transaction cycle approach to assessing control risk is testing controls related to transactions involving the sale of goods to customers. The auditor most likely is testing controls over

Collection of receivables.

A limitation on the scope of an audit sufficient to preclude an unmodified opinion will usually result when management

Does not make the minutes of the board of directors' meetings available to the auditor.

Which of the following controls most likely would be effective in offsetting the tendency of sales personnel to maximize sales volume at the expense of high credit loss write-offs?

Employees involved in the credit-granting function are separated from the sales function.

Zero Corp. suffered a loss having a material effect on its financial statements as a result of a customer's bankruptcy that rendered a trade receivable uncollectible. This bankruptcy occurred suddenly because of a natural disaster 10 days after Zero's balance sheet date but 1 month before the issuance of the financial statements and the auditor's report. Under these circumstances, the

Financial Statements should be adjusted NO Event Requires Financial Statement Disclosure, but No Adjustment YES Auditor's Report should be modified for a lack of consistency NO

An auditor may issue an unmodified audit report when the

Group engagement partner assumes responsibility for the work of a component auditor.

If a material change in estimate is inseparable from a change in accounting principle, this event should be evaluated by the auditor as a change in

Principle, and the auditor should report on consistency.

An auditor released an audit report that was dual-dated for a subsequently discovered fact occurring after the date of the auditor's report but before issuance of the related financial statements. The auditor's responsibility for events occurring subsequent to the original report date was

Limited to the specific event referenced.

Under which of the following circumstances would the expression of a disclaimer of opinion be inappropriate?

Management does not provide reasonable justification for a change in accounting principles.

In a financial statement audit, an auditor disclaims an opinion because of an inability to obtain sufficient appropriate audit evidence. The most likely reason for this result is

Management's prevention of the confirmation of receivables.

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?

New information is discovered concerning undisclosed related-party transactions of the prior year.

Due to a scope limitation, an auditor disclaimed an opinion on the financial statements as a whole, but the auditor's report included a statement that the current asset portion of the entity's balance sheet was fairly stated. The inclusion of this statement is

Not appropriate because it may tend to overshadow the auditor's disclaimer of opinion.

Which of the following procedures should an auditor perform concerning litigation, claims, and assessments?

Obtain a list from management that discloses all unasserted claims that it considers to be probable of assertion.

An auditor of a nonissuer was engaged by the client to use PCAOB auditing standards to conduct the audit. The auditor should refer in the report to

PCAOB Auditing Standards YES Generally Accepted Auditing Standards YES

Sound internal control principles dictate that, immediately upon receiving checks from customers by mail, a responsible employee should

Prepare a duplicate listing of checks received.

Some subsequent events provide evidence of conditions not in existence at the balance sheet date. Under U.S. GAAP, some of these events are of such a nature that disclosure is required to keep the financial statements from being misleading. Adequate disclosure of these events may include

Pro forma financial statement presentation.

An auditor was unable to obtain audited financial statements or other evidence supporting an entity's investment in a foreign subsidiary. Between which of the following reports should the entity's auditor choose?

Qualified and disclaimer.

Which of the following procedures should an auditor ordinarily perform regarding subsequent events?

Read the latest subsequent interim financial statements.

A CPA firm is completing the field work for an audit of Swenson Co. for the current year ended December 31. The manager in charge of the audit is performing the final steps in the evidence accumulation phase of the audit and notes that there have been several changes in Swenson during the year under audit. Which of the following items would indicate there could be substantial doubt about Swenson's ability to continue as a going concern for a reasonable period of time?

Recurring working capital shortages.

A limitation on the scope of the audit sufficient to preclude an unmodified opinion is most likely to result when management

Refuses to permit its lawyer to respond to the letter of audit inquiry.

An auditor should be aware of subsequent events that provide evidence concerning conditions that did not exist at year end but arose after year end. These events may be important to the auditor because they may

Require disclosure to keep the financial statements from being misleading.

The most effective audit procedure for determining the collectibility of an account receivable is the

Review of the subsequent cash collections.

An auditor may reasonably express an "except for" qualified opinion for a(n)

Scope Limitation YES Unjustified Change in an Accounting Principle YES

Which of the following would cause an auditor of an entity's financial statements to issue either a qualified opinion or a disclaimer of opinion?

Scope limitation involving a recorded uncertainty.

Tracing bills of lading to sales invoices provides evidence that

Shipments to customers were invoiced.

An auditor is determining whether internal control relative to the revenue cycle of a wholesaling entity is operating effectively in minimizing the failure to prepare sales invoices. The auditor most likely would select a sample of transactions from the population represented by the

Shipping document file.

After an audit report containing an unmodified opinion on a nonissuer's financial statements was dated and the financial statements issued, the client decided to sell the shares of a subsidiary that accounts for 30% of its revenue and 25% of its net income. The auditor should

Take no action because the auditor has no obligation to make any further inquiries.

For a nonissuer that does not receive governmental financial assistance, an auditor's report on financial statements generally would not refer to

The auditor's use of confirmations and analytical procedures.

The auditor's report in an audit of an issuer may be addressed to

The board of directors and shareholders.

Analytical procedures performed during an audit indicate that accounts receivable doubled since the end of the prior year. However, the allowance for doubtful accounts as a percentage of accounts receivable remained about the same. Which of the following client explanations would satisfy the auditor?

The client opened a second retail outlet during the current year, and its credit sales approximately equaled the older outlet.

Limitation on the scope of the audit may require the auditor to express a qualified opinion or to disclaim an opinion. Which of the following is a limitation on the scope of the audit?

The unavailability of sufficient appropriate evidence.

In which of the following situations would an auditor ordinarily choose between expressing a qualified opinion and an adverse opinion?

The financial statements fail to disclose information that is required by the applicable reporting framework.

An auditor decides to express 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

The possible effects on the financial statements.

An auditor's report included the following paragraph relative to substantial doubt about a client's ability to continue as a going concern: "The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. If the Company is not able to renew the contract described in Note X, there may be substantial doubt about the company's ability to continue as a going concern." Which of the following statements is true?

The report should not contain conditional language.

When scheduling the audit work to be performed on an engagement, the auditor should consider confirming accounts receivable balances at an interim date if

The risk of material misstatement relative to financial statement assertions about receivables is acceptably low.

A CPA has received legal counsel's letter in which no significant disagreements with the client's assessments of contingent liabilities were noted. The resignation of the client's legal counsel shortly after receipt of the letter should alert the auditor that

Undisclosed unasserted claims may have arisen.

Eagle Company's financial statements contain a departure from generally accepted accounting principles because, due to unusual circumstances, the statements would otherwise be misleading. The auditor should express an opinion that is

Unmodified and describe the departure in an other-matter paragraph.

Green Company, an issuer, uses the first-in, first-out method of costing for its international subsidiary's inventory and the last-in, first-out method of costing for its domestic inventory. The different costing methods will cause Green's auditor to issue a report with a(n)

Unqualified opinion.

A CPA had the management of Paper Plate Corp. prepare a letter requesting Paper Plate's external counsel to identify any pending and/or unasserted claims against Paper Plate. The CPA received a letter from the external counsel with the following response: "We are only aware of the following: Paper Plate was named as the defendant in a class action lawsuit for an alleged defective product manufactured 2 years ago. There is a remote possibility that Paper Plate will suffer any damages, because this firm has successfully defended similar cases in the past. However, similar cases that have been brought against competitors were settled between $1.5 and $2 million." Should the CPA accept the letter from the external counsel?

Yes, even though the CPA did not get a specific amount of loss.