Audit Final (Ch 11; 12; Mod. A)
T or F. When there is a material departure from GAAP, auditors may issue either an adverse opinion or disclaimer of opinion on the entity's financial statements
False
An assurance service is defined as a service that
Improves the quality of information for decision makers
Which of the following best describes the auditors' responsibility with respect to management's estimates?
Evaluating the reasonableness of management's estimates
In an audit of contingent liabilities, which of the following procedures would be least effective?
Examining customer confirmation replies
If the auditor expresses an adverse or disclaimer of opinion on the complete set of financial statements, she or he is not permitted to:
Express an unmodified opinion on a single financial statement.
When auditors render an adverse opinion on the entity's financial statements, the
Introductory paragraph, Management's Responsibility section, and Auditor's Responsibility section should not be modified.
Which of the following procedures would auditors most likely perform in obtaining evidence about subsequent events?
Investigate changes in long-term debt occurring after year end.
Which of the following substantive procedures would auditors most likely perform to obtain evidence about the occurrence of subsequent events?
Investigate changes in shareholders' equity occurring after the date of the financial statements
The standard report issued by a CPA after reviewing the financial statements of a nonissue in accordance with Statements on Standards for Accounting and Review Services (SSARS) should state that the CPA:
Is not aware of any material modifications that should be made to the financial statements.
For which of the following objectives would auditors be least likely to use analytical procedures near the end of the audit?
Obtaining evidence about assertions related to account balances or classes of transactions
General Retailing, a nonissuer, has asked Ford, CPA, to compile its financial statements that omit substantially all disclosures required by GAAP. Ford may comply with General's request provided the omission is clearly indicated in Ford's report and the:
Omission is not undertaken with the intention of misleading the users of General's financial statements.
Financial statements are in accordance with accounting principles generally accepted in the United States of America.
Opinion paragraph
Results of its operations and its cash flows.
Opinion paragraph
The financial statements present fairly, in all material respects.
Opinion paragraph
The financial statements referred to above present fairly, in all material respects, the financial position of...
Opinion paragraph
An important method used by auditors to learn of material contingencies is
obtaining responses to an attorney letter.
which of the following is ordinarily performed last in the audit examination?
obtaining signed written representations
The standard (unmodified) report issued in the audit of a nonpublic entity includes a(n)
opinion paragraph providing the auditors' conclusion as to the fair presentation of the financial statements.
An entity's income statements were misstated due to the recording of journal entries that involved debits and credits to an unusual combination of expense and revenue accounts. Auditors most likely could have detected this irregularity by
performing analytical procedures designed to disclose differences from expectations.
When interim financial information is presented in a footnote to annual financial statements, the standard audit report on the annual financial statements should
Not mention the interim information unless there is an exception that the auditors need to include in the report
In providing assurance services to clients, CPAs are building on their reputations for
Objectivity and integrity.
Shelly's Bank has loaned money to Pete's Auto Supply. The loan is collateralized by inventory. The loan also requires a CPA to observe the count of the inventory and trace sampled items to the vendor invoices in order to determine the value of inventory is not misstated. This service would be:
Obtain an attorney's letter regarding litigation and unasserted claims.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion paragraph
Which of the following procedures is not used in auditors' examination of litigation, claims, and assessments?
Performing analytical procedures
Which of the following substantive procedures would not ordinarily be used by auditors in evaluating the potential existence of subsequent events?
Performing cut-off testing near year end
A service whereby the practitioner assists in assembling financial information, but issues no report.
Preparation of Financial Statements
The accountant issues no report.
Preparation of financial statements.
Which of the following would be considered a preparation of financial statements engagement?
Preparation of personal financial statements for presentation alongside a financial plan
Limited to presenting in the form of financial statements information that is the representation of management, without issuing a report.
Preparation of unaudited financial statements.
On which of the following matters would it not be appropriate for the auditors to report using an other-matter paragraph?
The consistency of summary financial statements with the audited financial statements from which they were derived
Which of the following events or activities may occur following the audit report release date?
Subsequently discovered facts
Which of the following paragraphs or sections of the group auditors' report is modified to identify the extent of component auditor involvement in the audit of group financial statements?
The Auditor's Responsibility section
Which of the following is correct regarding a compilation of financial statements engagement in accordance with Statement on Standards for Accounting and Review Services?
The accountant is not required to make inquiries nor perform procedures to corroborate the information provided by the client.
In which of the following circumstances would a qualified opinion not be appropriate?
The auditors lack independence with respect to the audited entity.
When auditors lack independence, which of the following is true about the report on the entity's financial statements that should be issued?
The auditors should disclaim an opinion and should state specifically that they are not independent.
Which of the following best describes the auditors' responsibility when financial statements are presented in comparative format?
The auditors' report must refer to all financial statements presented in comparative form, regardless of whether they have been audited by the current auditors or predecessor auditors.
T or F. If the audit scope is restricted in some specific respect, but sufficient appropriate evidence is gathered by performing other procedures, the auditors' standard report need not be modified.
True
T or F. In all cases where auditors are associated with unaudited financial statements, the auditors must issue a disclaimer of opinion.
True
T or F. The Auditor's Responsibility section of the auditors' report contains a general description of the audit work and reference to generally accepted auditing standards.
True
T or F. The auditors' report on summary financial statements will indicate whether those statements are fairly stated in relation to the complete financial statements.
True
T or F. The auditors' report references the consistent application of accounting principles only when the entity has changed accounting principles.
True
T or F. The introductory paragraph of the auditors' report indicates that an audit has been conducted and identifies the financial statements the auditors examined.
True
T or F. When component auditors are involved in the audit of group financial statements, the Auditor's Responsibility section of the group auditor's report would be modified.
True
The official Statements on Standards for Accounting and Review Services are applicable to practice with
Unaudited financial statements of nonissuers.
To perform an attestation engagement on prospective information or pro forma information, accountants must do all of the following except
Understand the internal controls used in the processes that generated the information.
To perform an attestation engagement on prospective information or pro forma information, accountants must do all of the following except:
Understand the internal controls used in the processes that generated the information.
An engagement whereby a practitioner provides limited assurance about financial information.
Review Service
Accountants are permitted to express "negative assurance" in which of the following reports?
Review report on unaudited financial statements.
what is an auditor's primary method to corroborate information on litigation, claims, and assessments?
Reviewing the written representation letter obtained from management
A reasonable basis for expressing limited assurance that there are no material modifications that should be made to the statements.
Reviews of unaudited financial statements of a nonissuer.
It is substantially less in scope than an audit in accordance with generally accepted auditing standards.
Reviews of unaudited financial statements of a nonissuer.
The information should conform to the accounting principles in ASC 270, "Interim Financial Reporting."
Reviews of unaudited interim financial statements of a public company.
Which of the following is the most effective method of identifying potential earnings management attempts?
Scanning accounts for unusual items
An entity that provides a service to another company regarding the processing of transactions or information.
Service Organization
subsequent knowledge of which of the following would cause the entity to adjust its December 31 financial statements?
Settlement of litigation in February for $100,000 that had estimated at $12,000 in the December 31 financial statements
Which of the following would not be communicated to users in the auditors' report on an entity's financial statements and related disclosures?
Specific details regarding the audit examination, such as the materiality threshold used to identify material misstatements
Which of the following statements is most likely to be included in an attorney letter?
" Please furnish to our auditors such explanation, if any , that you consider necessary to supplement the foregoing information"
Which of the following is a generally accepted attestation standard but is not a fundamental auditing principle?
Adequate knowledge of the subject matter.
Our responsibility is to express an opinion on these financial statements based on our audits.
Auditor's Responsibility section
When auditors conclude that a material and pervasive departure from GAAP exists in an entity's financial statements, which of the following phrases would most likely be included in their report?
"Do not present fairly in all material respects."
Which of the following phrases would auditors most likely include in their report when expressing a qualified opinion on the entity's financial statements because of inadequate disclosure?
"Except for the omission of the information discussed in the preceding paragraph."
Which of the following statements is not included in the Auditor's Responsibility section of the standard (unmodified) report?
"In accordance with accounting principles generally accepted in the United States of America."
Which of the following statements is not included in the Auditor's Responsibility section of the standard (unmodified) report on the entity's financial statements?
"We have audited the accompanying financial statements..."
Holmes & Smith, LLP, were engaged to audit the financial statements of Sodolak Reality for the year ended December 31. During the engagement, Sodolak filed a lawsuit against Holmes & Smith, LLP. What effect, if any, will this lawsuit have on the auditors' report?
A disclaimer of opinion should be issued because the auditors' independence is impaired.
Which of the following is typically not included in the inquiry letter sent to the client's attorneys?
A disclaimer regarding the likelihood of settlement of pending litigation
Entity has changed from FIFO to LIFO accounting for inventories.
Additional paragraph added to report.
Which of the following is an example of a material accounting change that requires recognition in an unmodified opinion on the entity's financial statements?
A change in the entity's form of reporting entity
Which of the following is not included in the Auditor's Responsibility section of the standard (unmodified) report on the entity's financial statements?
A conclusion that the financial statements are in accordance with GAAP.
Ambrose is auditing the financial statements of Mays (dated December 31, 2014). the date of the auditor's report is February 17, 2015, and the audit report release date is February 20, 2015. For which of the following matter would Ambrose have the least responsibility?
A major loss due to a catastrophe that occurred and was known by Ambrose on March 1, 2015
An accountant need not assess compliance with independence rules during
A preparation of financial statement engagement.
Which of the following report modifications would be necessary if group auditors are indicating the involvement of component auditors in the audit of group financial statements?
A reference to the components (and dollar and percentage magnitudes of the components) examined by component auditors in the Auditor's Responsibility section.
If the date of an entity's financial statements is December 31, the date of the auditor's report is February 20, and the audit report release date is February 22, which of the following is considered a subsequent event?
A significant acquisition that was announced on February 1 and will be finalized on October 1.
Which of the following statements should be included in a practitioner's report on the application of agreed-upon procedures?
A statement referring to standards established by the AICPA
Departure from GAAP that has a material and pervasive effect on the financial statements.
Additional paragraph added to report; Modification to opinion paragraph
Auditors are required to reference consistency in their report when there are changes in
Accounting Principles
Auditors wish to highlight an event that occurred following the date of the financial statements.
Additional paragraph added to report.
Auditors would like to disclose potential going-concern uncertainties in their report (these uncertainties have been appropriately disclosed in the entity's financial statements and related disclosures).
Additional paragraph added to report.
A client has capitalizable leases but refuses to capitalize them in the financial statements. Which of the following reporting options does an auditor have if the amounts pervasively distort the financial statements?
Adverse Opinion
If a going-concern uncertainty exists, auditors may not issue which of the following reports on the entity's financial statements?
An adverse opinion because of a pervasive departure from GAAP, assuming that the disclosures about going-concern uncertainties are adequate.
Which of the following best describes an engagement to report on an entity's internal control over financial reporting for a nonpublic company?
An attestation engagement to examine and report on management's written assertions about the effectiveness of its internal control structure.
which of the following is not included in the standard (unmodified) report on the finaancial statements?
An emphasis-of-matter paragraph commenting on the effect of economic conditions on the entity
In which of the following should an auditors' report refer to the lack of consistency when there is a change in accounting principle that is significant?
An emphasis-of-matter paragraph following the opinion paragraph
What is the major difference between a reissued report and an updated report?
An updated report considers information that has come to their attention since the date of the original report, while a reissued report does not consider this information.
Professional services aimed at improving the quality of information both financial and non-financial for decision makers.
Assurance Service
Professional services resulting in a report on subject matter or a claim about subject matter that is the responsibility of another party.
Attestation
Audit provides a reasonable basis for an opinion.
Auditor's Responsibility section
Auditors perform the audit to obtain reasonable assurance.
Auditor's Responsibility section
Auditors' responsibility is to express an opinion.
Auditor's Responsibility section
Conducted our audits in accordance with the auditing standards generally accepted in the United States of America.
Auditor's Responsibility section
In a standard (unmodified) report, which of the following paragraphs or sections would indicate that auditors conducted their audits in accordance with generally accepted auditing standards?
Auditor's Responsibility section.
To whom should written representations be addressed?
Auditors
Which of the following best describes auditors' responsibilities with respect to evaluating the going-concern status of the entity?
Auditors are required to consider evidence obtained during the audit that may provide information with respect to going-concern status and modify their report on the financial statements if substantial doubts exist.
Which of the following is not a difference in the audit examinations and reports for public and nonpublic entities?
Auditors are required to express an opinion on internal control in the audit of nonpublic entities but not in the audit of public entities
What is the auditors' responsibility for reporting on other information accompanying financial statements?
Auditors are required to report on other information only if it is misstated or inconsistent with the financial statements.
Assume that Rory is auditing the financial statements of Augusta Inc. Rory completes his fieldwork on February 25 and his report (along with Augusta's financial statements) is issued on March 1. On March 3, a hurricane destroys a warehouse that contains a significant amount of uninsured inventory. Which of the following best describes Rory's responsibility with respect to the effects of this hurricane on Augusta's financial statements?
Because the hurricane occurred after the release of the financial statements and Rory's report, he has no responsibility to perform additional procedures or reissue his report.
Auditors try to identify predictable relationships when using analytical procedures. Relationships involving transactions from which of the following accounts most likely would yield the highest level of evidence?
Interest expense
Which party should request a letter regarding litigation, claims, and assessments from the client's attorney?
Client
Company A hired Samson & Delilah, CPAs to audit the financial statements of Company B and deliver the report to Megabank. Who is the client?
Company A
Which of the following substantive procedures should auditors ordinarily perform regarding subsequent events?
Compare the latest available interim financial statements with the financial statements being audited
A service whereby the practitioner assists in assembling financial information and issues a report providing no assurance.
Compilation
When accountants are not independent, which of the following reports can they nevertheless issue?
Compilation report.
Limited to presenting in the form of financial statements information that is the representation of management, including issuing a report indicating the financial statements are unaudited.
Compilations of financial statements.
What course of action should auditors take if, after evaluating management's plan to mitigate the effect of factors that suggest going-concern uncertainties, they believe that substantial doubt about going concern does not exist?
Conclude that substantial doubt about going concern does not exist and not require financial statement disclosure or modification of the auditors' report.
Which of the following auditing procedures most likely would assist auditors in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern?
Confirming with third parties the details of arrangements to maintain financial support
The primary reason auditors request responses to attorney letter is to provide auditors
Corroboration of the information furnished by management about litigation, claims, and assessments
Which of the following would not ordinarily be considered when using analytical procedures to verify the overall reasonableness of revenue and expense accounts?
Current-year recorded (unaudited) balances
After the audit report release date, auditors determine that an important auditing procedure was omitted. Which of the following initial courses of action is most appropriate?
Determine whether the omitted procedures is important in supporting the auditors' opinion on the entity's financial statements
Following the audit report release date, auditors became aware of facts existing at the report date that would have affected the reports had auditors then been aware of such facts. What is the most appropriate initial course of action that auditors should take?
Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information.
Which of the following activities is an accountant not responsible for in review engagements performed in accordance with Statements on Standards for Accounting and Review Services?
Developing an understanding of internal control.
Which of the following is not an appropriate reporting option when component auditors are involved in the audit of group financial statements, assuming that the component auditors' work did not identify any issues affecting the group auditors' report?
Disclaim an opinion on the portion of the financial statements examined by the component auditors.
When an entity will not permit inquiry of outside legal counsel, the auditors' report on the entity's financial statements will ordinarily contain a(n)
Disclaimer of Opinion
Holmes, CPA, assisted Williams Corporation in preparing its financial statements and gave Williams permission to use Holmes's name in communications containing these financial statements. If Holmes did not audit the financial statements, what type of opinion should be expressed?
Disclaimer of opinion because Holmes did not audit the financial statements
The entity's management has not provided written representations requested by the auditors. The failure to provide these representations is considered to be a significant limitation on the scope of the auditors' work...
Disclaimer of opinion or Qualified opinion
The entity has a lawsuit pending against them. There is significant uncertainty about the outcome of the lawsuit, which could have a highly material impact on the viability of the entity. Management has provided adequate disclosure of the lawsuit in the footnotes accompanying the financial statements.
Disclaimer of opinion or Unmodified opinion, emphasis-of-matter paragraph for a going-concern uncertainty.
If the auditors encounter a material scope limitation in the examination of the entity's financial statements, which of the following types of opinions could be issued?
Disclaimer of opinion or qualified opinion.
The entity hired the auditors after taking inventory on December 31. The accounting records and other evidence are not reliable enough to enable the auditors to have sufficient evidence about the proper inventory amount.
Disclaimer or Qualified
During the year under audit, Forrest Corporation experienced significant losses due to a pervasive fraud scheme. Because of the lack of documentary evidence and inability to perform appropriate auditing procedures, the auditors were unable to determine the total amount of the loss. What type of report should the auditors issue?
Disclaimer or qualified opinion
Which of the following is an audit procedure that auditors most likely would perform concerning litigation, claims, and assessments?
Discuss with management its policies and procedures adopted for evaluating and accounting for litigation, claims, and assessments.
A report that acknowledges reliance on the reports of component auditors is a type of report modification known as a(n)
Division of responsibility
Which of the following conditions or set of circumstances would not ordinarily raise questions about the entity's ability to continue as a going concern?
Failure to meet forecasted earnings per share
(T/F) Auditors are not responsible for determining whether there is a substantial doubt about an entity's ability to continue as a going concern.
False
T or F. The introductory paragraph of the auditors' report identifies management's responsibility for the financial statements.
False
T or F. If auditors cannot apply specific auditing procedures during the examination, the opinion paragraph in the report must be qualified.
False
T or F. If comparative financial statements were examined by predecessor auditors, those auditors' reports must be presented along with the auditors' report.
False
T or F. If group auditors choose to rely on the work of component auditors, the group auditors must refer to the component auditors in their report by name.
False
T or F. If other auditors examined prior-year financial statements presented in comparative form, the auditors' report on the current-year financial statements should not reference the prior-year financial statements.
False
T or F. The first paragraph of the standard report on the entity's financial statements is referred to as the scope paragraph.
False
During a review of a nonissuer's financial statements, accountants are required to make certain inquiries of management. Which of the following inquiries is not required by the SSARS?
Internal control deficiencies.
We have audited the accompanying financial statements of...
Introductory paragraph
We have audited the accompanying financial statements.
Introductory paragraph
Components of Compilation:
Less Scope; Not worried about independence; no footnotes; minimal understanding of Internal Controls
Which of the following subsequent events would represent an event that provides information about conditions that arose following the date of the financial statements?
Loss of inventory as a result of a flood
Which of the following procedures regarding notes payable would an accountant most likely perform during a nonissuer's review engagement?
Making inquiries of management regarding maturities, interest rate, and collateral.
The performance of an attestation engagement on prospective financial information does not require which of the following?
Management must disclose the probability of obtaining the results included in the prospective financial information.
Which of the following conditions must be met before an accountant can conduct an examination of an entity's internal control?
Management must present its assertion about the effectiveness of its internal control in a written report.
For a compliance engagement, three conditions must be met. Which of the following is not one of the three conditions?
Management provides a report attesting to satisfactory compliance.
Management is responsible for the design, implementation, and maintenance of internal control.
Management's Responsibility section
Management is responsible for the preparation and fair presentation of these financial statements...
Management's Responsibility section
Responsibility of the entity's management for the financial statements.
Management's Responsibility section
Which of the following items would appear in written representations in the audit of a public entity but not a nonpublic entity?
Management's opinion as to the effectiveness of its internal control over financial reporting
Which of the following scope limitations would ordinarily be of most concern to the auditors?
Management's refusal to provide auditors with written representations
Carson, LLP, audited Best Corporation's financial statements for the year ended December 31, Year 1. On February 15, Year 3, Carson gave Best permission to reissue the report previously issued on and dated March 1, Year 2. When is the cutoff date for Carson's responsibility on the reissued report?
March 1, Year 2
Group auditors decide to refer to the work of component auditors in their report.
Modification to Auditor's Responsibility section; Modification to opinion paragraph.
Scope limitation that precludes auditors from expressing an opinion.
Modification to introductory paragraph; Modification to Auditor's Responsibility section; Modification to opinion paragraph; Additional paragraph added to report.
Departure from GAAP that has a material, but not pervasive, effect on the financial statements...
Modification to opinion paragraph; Additional paragraph added to report.
Inability of auditors to confirm accounts receivable with customers; while the scope limitation is material, the auditors still believe an opinion may be expressed on the entity's financial statements.
Modification to opinion paragraph; Additional paragraph added to report.
Which of the following events occurring after the audit report release date most likely would cause auditors to make further inquiries about the previously-issued financial statements?
New information is discovered concerning undisclosed lease transactions during the period under audit.
Departure from GAAP that does not materially affect the financial statements.
No modifications to the standard (unmodified) report are necessary.
Group auditors decide to assume full responsibility for the work of component auditors and not refer to component auditors' work in their report.
No modifications to the standard (unmodified) report are necessary.
The auditors conclude that an entity's illegal act, which has a material effect on the financial statements, has not been properly accounted for or disclosed. Depending on the overall materiality and pervasiveness of the effect of this illegal act on the financial statements, the auditors should express either a(n)
Qualified Opinion of Adverse Opinion
Which of the following reporting options is available if the client refuses to provide auditors with written representations?
Qualified opinion or disclaimer of opinion
The entity has a lawsuit pending against them. It is probable that the entity will lose the suit. Management has not accrued the best estimate of the loss, but has provided information in the footnotes. It is not expected that this lawsuit will have a significant effect on the entity's ability to continue as a going concern.
Qualified opinion.
The entity failed to capitalize lease assets and obligations but explained them fully in the notes to the financial statements. These lease obligations meet the criteria for capitalization under ASC 840.
Qualified or Adverse
The entity is defending a lawsuit on product liability claims. (Customers allege that power saw safety guards were improperly installed.) All facts about the lawsuit are disclosed in the notes to the financial statements, but the auditors believe the entity should record a loss based on a probable settlement mentioned by the entity's attorneys.
Qualified or Adverse
The auditors decided that sufficient appropriate evidence could not be obtained to complete the audit of significant investments the entity held in a foreign entity.
Qualified or Disclaimer
Management determined it was probable that a pending litigation claim would result in a material loss. The loss was disclosed in the footnotes to the financial statements but was not accrued in the income statement. If the auditors believe an accrual should be made, what type of report should be issued?
Qualified or adverse opinion based on a departure from GAAP
Which of the following procedures would auditors most likely perform to obtain evidence about the occurrence of subsequent events?
Reading minutes of meetings of owners, management, or those charged with governance held after the date of the financial statements
Which of the following procedures is ordinarily performed by an accountant in a compilation engagement of a nonpublic entity?
Reading the financial statements to consider whether they are free of obvious mistakes in the application of accounting principles.
when financial statements are presented in comparative form and another firm audited the prior-years' financial statements (but the other firm's report is not presented with the financial statements) the auditors' report on the current-year financial statements should
Refer to the report and type of opinion issued by the other firm on the prior-year financial statements
If the opinion issued on prior-years' financial statements is no longer appropriate and financial statements are presented in comparative form, the auditors' current report should
Reference the type of opinion issued on the prior-years' financial statements and indicate that the current opinion on these financial statements differs from that expressed in the prior years
Which of the following situations would not result in auditors adding an additional paragraph to their report without modifying the introductory, scope, or opinion paragraphs of that report?
Reference to a departure from GAAP that is material, but not pervasive, to the financial statements
Situations in which auditors provide additional copies of a previous issued report or grant entities permission to use a previously issued report in a document containing financial statements after its original date are known as
Reissued Reports
Examination or agreed-upon procedures about conforming to the rules and regulations of a regulatory agency.
Reports on compliance with contractual agreements or regulatory requirements.
In our opinion, the schedule of accounts receivable referred to above presents fairly, in all material respects.
Reports on elements, accounts, or items of a financial statement.
In our opinion, the schedule of inventory referred to above presents fairly, in all material respects.
Reports on elements, accounts, or items of a financial statement.
As described in Note 2, these financial statements were prepared on the cash receipts and disbursements basis of accounting.
Reports on financial statements prepared special purpose framework.
Management issues a separate report containing assertions.
Reports on internal control.
The report identifies specific users and describes, in detail, the procedures specified by the users.
Reports on the agreed-upon procedures.
Which of the following would cause the auditors to issue a report on the entity's financial statements other than a standard (unmodified) report?
The entity omitted necessary information from its footnote disclosures that were material to the financial statements.
In which of the following circumstances would auditors be most likely to express an adverse opinion?
The financial statements are not in accordance with generally accepted accounting principles regarding the capitalization of leases.
Why is it the client's decision to record adjustments to the financial statements?
The financial statements are the responsibility of the client's management.
Under which of the following circumstances would a disclaimer of opinion on the entity's financial statements not be appropriate?
The financial statements fail to contain adequate disclosure of related-party transactions.
In which of the following situations would auditors ordinarily choose between expressing a qualified opinion or an adverse opinion on the entity's financial statements?
The financial statements fail to disclose information that is required by generally accepted accounting principles.
Which of the following is included in the introductory paragraph of the standard (unmodified) report on the entity's financial statements?
The names of the financial statements audited.
Which of the following guidelines should be followed when a disclaimer of opinion is issued?
The report should identify the financial statements accompanying the disclaimer of opinion.
Which of the following situations would require auditors to add an other-matter paragraph to their report on comparative financial statements?
The updated opinion issued on prior-years' financial statements differs from the opinion originally issued on those financial statements.
Harper is surfing the Internet and finds a great pair of roller blades at a really low price, but he has never heard of the company and is concerned that the product he ordered may not be the product he receives. Harper may be more willing to place an order with this company if
The website displays the WebTrust seal.
In which of the following circumstances would auditors most likely add an emphasis-of-matter paragraph to the standard (unmodified) report without modifying the opinion on the entity's financial statements?
There is substantial doubt about the entity's ability to continue as a going concern.
Why should auditors be particularly concerned with "miscellaneous", "other", and "clearing" accounts classified as revenues or expenses?
These accounts may represent attempts of earnings management.
Which of the following is not a purpose of the review of audit documentation by a supervisor during fieldwork?
To ensure that the overall scope of the audit was appropriate
What is the primary purpose of obtaining written representations?
To impress upon management its primary responsibility for the financial statements
T or F. Auditors are required to issue a report on internal control over financial reporting in the audit of a public entity, but not in the audit of a nonpublic entity.
True
Because the entity has experienced significant operating losses and has had to obtain waivers of debt payment requirements from its lenders, the auditors decide that there is substantial doubt that the entity can continue as a going concern. The entity has fully described all problems in a note in the financial statements and the auditors believe that, while material, the uncertainty is not serious enough to warrant a disclaimer of opinion.
Unmodified
The FASB requires the energy company to present supplementary oil and gas reserve information outside the basic financial statements. The auditors find that this information, which is not required as a part of the basic financial statements, has been omitted.
Unmodified
The auditors are group auditors of the parent company, but they reviewed the component auditors' work and reputation and decide not to take responsibility for the work of the component auditors on three subsidiary companies included in the consolidated financial statements. The component auditors' work amounts to 32 percent of the consolidated assets and 39 percent of the consolidated revenues.
Unmodified
The entity changed its depreciation method from units of production to straight line, and its auditors believe the straight-line method is the more appropriate method in the circumstances. The change, fully explained in the notes to the financial statements, has a material effect on the year-to-year comparability of the comparative financial statements.
Unmodified
If financial statements contain an immaterial departure from accounting principles, the auditors can render a(n)
Unmodified Opinion
Which of the following reporting options would auditors use if the entity changed the estimated lives of its property, plant and equipment and accounted for the change correctly?
Unmodified Opinion
The timing of Green's appointment and the start of fieldwork made confirmation of accounts receivable by direct communication with the customers not feasible. However, Green applied other procedures and was satisfied as to the reasonableness of the account balances. Green's auditors' report most likely contained a(n)
Unmodified opinion
Harris is auditing the financial statements of Cole Corp., an energy company. The FASB requires that these financial statements must be accompanied by supplementary mineral reserve information. If this required information is materially misstated, what type of report should Harris issue?
Unmodified opinion with an other-matter paragraph disclaiming an opinion on the mineral reserve information
Based on recent analysis of usage, the entity has changed the useful life of its office equipment from five to four years. This change is reflected in the depreciation amounts computed for the current year.
Unmodified opinion, no modification.
The entity has a lawsuit pending against them. It is probable that the entity will lose the suit. Management has accrued the best estimate of the loss and provided adequate disclosure. It is not expected that this lawsuit will have a significant effect on the entity's ability to continue as a going concern.
Unmodified opinion, no modification.
Components of Review:
Use of analytical procedures; Management Representation Letter; Higher Understanding of Internal Controls
The phrase "Trust services" refers to:
WebTrust and SysTrust Services.
What is the appropriate name for an assurance service provided by a CPA regarding a client's commercial Internet site with reference to the principles of privacy, security, processing integrity, availability, and confidentiality?
WebTrust.
Restrictions imposed by an entity prohibited the observation of physical inventories, which accounted for 35 percent of total assets. Alternative auditing procedures were not feasible, although the auditors were able to examine satisfactory evidence for all other items in the financial statements. The auditors would most likely express
a disclaimer of opinion on the entity's financial statements.
Auditors will issue an adverse opinion when
a violation of generally accepted accounting principles is sufficiently material and pervasive that a qualified opinion is not justified.
If management fails to provide adequate justification for a change from one generally accepted accounting principle to another, the auditors should
add an additional paragraph and express a qualified or an adverse opinion on the entity's financial statements for lack of conformity with generally accepted accounting principles.
When auditors wish to issue an unmodified opinion but highlight that the entity changed in method of accounting for software development costs, they would most appropriately identify the change in accounting method in which of the following ?
an emphasis-of-matter paragraph
The procedures used in a review engagement are:
analytical procedures, inquiry, and obtaining a management representation letter.
The primary objective of analytical procedures used near the end of an audit is to
assist auditors in evaluating the overall financial statement presentation.
Auditors have a responsibility to evaluate whether financial statements properly reflect all known events through the
audit report release date.
Auditors must complete various phases of an audit after the date of the financial statements. The auditors' responsibility for matters affecting the client extends from the date of the financial statements to the
audit report release date.
An engagement quality review by a second partner of the audit documentation and financial statements is performed to ensure that the:
audit work meets the quality standards of the firm.
An auditor who is unable to form an opinion on a new client's opening inventory balances may issue an unmodified opinion on the current year's
balance sheet only.
Interim testing normally occurs between the ____ and the ____.
beginning of the year under audit; date of the financial statements
Before the impact of adjusting entries proposed by auditors are included in the client's financial statements, the adjustments must be approved by the
client's management.
The primary source of information auditors use to obtain information about litigation, claims, and assessments is the
client's management.
which of these persons generally does not participate in writing the management letter?
client's outside attorneys
When component auditors are involved in the audit of group financial statements, the group auditors are required to
consider the independence and professional reputation of the component auditors in deciding how to utilize their work.
After considering management's plans, an auditor concludes that there is substantial doubt about a client's ability to continue as a going concern for a reasonable period of time. The auditor's responsibility includes
considering the adequacy of disclosure about the client's possible inability to continue as a going concern.
Analytical procedures performed near the end of an audit generally include
considering unusual or unexpected account balances that were not previously identified.
The group auditors decide not to refer to the audit of component auditors who audited a subsidiary of the group financial statements. After making inquiries about the component auditors' professional reputation and independence, the group auditor most likely would
contact the component auditors and review the audit programs and working papers pertaining to the subsidiary.
Roll-forward work normally occurs between the ____ and the ____.
date of interim work; date of the auditors' report
Subsequent events occur between the ____ and the ____.
date of the financial statements; date of the auditors' report
which of these situations would require auditors to append an emphasis-of-matter paragraph about consistency to an otherwise unmodified opinion?
entity changed its inventory costing method from FIFO and LIFO
Zag Co. issues financial statements that present financial position and results of operations, but Zag omits the related statement of cash flows. Zag would like to engage Brown, CPA, to audits its financial statements without the statement of cash flows although Brown's access to all of the information underlying the basic financial statements would not be limited. Under the circumstances, Brown most likely would
explain to Zag that the omission requires a qualification of the auditors' opinion.
Auditors who are reporting on financial statements that contain a material departure from generally accepted accounting principles should include an additional paragraph and
express a qualified or adverse opinion.
Independent auditors must consider whether the entity has the ability to continue as a going concern. If a substantial doubt exists but disclosure is adequate and no other basis exists for modifying the report, the auditors would normally
express an unmodified opinion with an emphasis-of-matter paragraph describing the going-concern uncertainty.
When updating the report on prior-years' financial statements presented in comparative form, the auditors' responsibility for the prior-years' financial statements is
extended to the date of the updated audit report.
A major objective of written representations is to
impress on management it ultimate responsibility for the financial statements and disclosures.
Assurance services are defined as independent professional services that:
improve the quality of information, or its context, for decision makers
Extensible Business Reporting Language (XBRL) provides a computer readable identifying tag for each individual item of data. The advantages of XBRL include all of the following except:
improves the full disclosure of financial information.
Charlie Company's comparative financial statements include the financial statements of the prior year that were audited by predecessor auditors whose report on those financial statements is not presented. If the predecessor's report was qualified, the successor auditors should
indicate in their report the substantive reasons for the qualification issued by the predecessor auditors.
When a company uses a service organization to prepare its payroll, the company's auditors:
need to understand the internal controls over the transaction regardless of the location of the control.
An entity's comparative financial statements include the financial statements of the prior year that were audited by a predecessor auditor whose report is not presented. If the predecessor's report was qualified, the successor should
indicate the substantive reasons for the qualification in the predecessor auditors' opinion.
An auditor may report on summary financial statements that are derived from a complete set of audited financial statements only if the auditor
indicates whether the information is fairly stated in all material respects in relation to the complete financial statements.
When disclaiming an opinion due to a client-imposed scope limitation, auditors should describe the nature of the scope limitation in an additional paragraph and modify the
introductory paragraph, Auditor's Responsibility section, and opinion paragraph.
Reference in a group auditors' report to the fact that part of the audit of group financial statements was performed by component auditors most likely would be an indication of
involvement of component auditors in the audit of the group financial statements.
The auditors include an emphasis-of-matter paragraph in an otherwise unmodified report on the entity's financial statements to emphasize that the entity being reported on had significant transactions with related parties. The inclusion of this separate paragraph
is appropriate and would not otherwise affect the unmodified opinion.
When reporting on financial statements that include only summarized totals of account balances, the auditors' conclusion should state whether the information in the summary financial statements
is fairly stated, in all material respects, in relation to the complete financial statements.
A review service engagement involving unaudited financial statements involves:
less work than an audit but more work than a compilation
Which of the following is not required by generally accepted auditing standards?
management letter
Auditors most likely would issue a disclaimer of opinion on the entity's financial statements because of
management's refusal to furnish written representations.
SEC registrants' financial statements should be accompanied by all of the following reports except the
management's report on financial statements and related disclosures.
The scope of an audit is not restricted when an attorney letter limits the response to
matters to which the attorney has given substantive attention in the form of legal representation
When an accountant is engaged to compile a nonpublic entity's financial statements that omit substantially all disclosures required by GAAP, the accountant should indicate in the compilation report that the financial statements:
might influence users' conclusions about the business, if the disclosures were included.
When auditors are engaged to examine an entity's financial statements but decide to issue a disclaimer of opinion because of a scope limitation, the report would not
modify the Auditor's Responsibility section to identify the basis for the disclaimer.
When a circumstance-imposed scope limitation has a material but not pervasive effect on the sufficiency of the auditors' evidence, the auditors' report will
modify the opinion paragraph.
When auditors qualify their opinion on the entity's financial statements because of inadequate disclosure, the auditors should describe the nature of the omission in an additional paragraph and modify
neither the introductory paragraph nor Auditor's Responsibility section.
If the auditor obtains sufficient appropriate evidence on the entity's accounts receivable balance by alternative procedures because it is impracticable to confirm accounts receivable, the opinion on the entity's financial statements should be unmodified and would
not mention the alternative procedures.
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 auditors should
not refer to consistency in the report.
Auditors should disclose the substantive reasons for expressing an adverse opinion on the entity's financial statements in an additional paragraph
preceding the opinion paragraph.
Auditors found that the entity has not capitalized a material amount of leases in the financial statements. when considering the materiality of this departure from GAAP, the auditors would choose between which reporting options?
qualified opinion or adverse opinion
If financial statements contain a material but nonpervasive departure from generally accepted accounting principles, the auditors should render a(n)
qualified opinion with reference to departure.
When other information is presented in a document with audited financial statements, the auditors' report should
reference the other information only if inconsistencies or material misstatements are identified between this information and the financial statements.
When a predecessor auditor has examined the prior-years' financial statements presented in comparative format, the current auditors' report should
reference the predecessor auditors' report in an other-matter paragraph.
When component auditors are involved in the audit of group financial statements, the group auditors may issue a report that
refers to the component auditors, describes the extent of the component auditors' work and expresses an unmodified opinion
"As described in Note 5 to the financial statements, General Express changed its statistical method of computing product warranty expense for the year ended December 31, 2014..." is an illustration of a
report with a consistency modification.
Near the end of an audit, the application of analytical procedures is
required by auditing standards.
In an agreed-upon procedures engagement, an accountant: a. follows all of the fundamental principles of GAAS.
restricts the report to specified users.
which of the following normally occurs earliest in the audit examination?
review of audit documentation
The auditors conclude that there is a material inconsistency in the "other information" in an annual report to shareholders containing audited financial statements. If the auditors conclude that the financial statements do not require revision, but the entity refuses to revise or eliminate the material inconsistency, the auditors may
revise the report on the entity's financial statements to include an other-matter paragraph describing the material inconsistency.
Management letters are not a means of
satisfying professional requirements to communicate matters related to the client's internal control.
which of these substantive procedures is not used to obtain evidence about contingencies?
scanning expense accounts for credit entries
How is the auditors' responsibility for expressing the opinion on financial statements disclosed in the standard (unmodified) report?
stated explicitly in the auditor's responsibility section
If an entity had litigation pending at the date of the financial statements and auditors learn of the outcome of this litigation following the date of their report (but prior to the audit report release date), this is known as a(n):
subsequently discovered fact.
Hart, CPA, is auditing the year 2 financial statements of Kell Co. Previously, Hart audited Kell's year 1 financial statements and expressed a qualified opinion due to a scope limitation. Hart decides to include an other-matter paragraph in the year 2 report because comparative financial statements are being presented for year 2 and year 1. This paragraph should indicate the
substantive reasons for the prior-year's qualification.
After the audit report release date, an outstanding lawsuit against Big Company was settled for materially more than recorded in the December 31, 2014 financial statements. The amount recorded in the financial statements represented the best estimate of management and the company's attorneys at the time the audit was completed. Based on this new information, Small and Tall, CPAs should
take no action since the event took place after the audit report release date.
Auditors have a responsibility related to management's disclosure of new information related to subsequent events until
the audit report release date
The issuance of a disclaimer of opinion generally indicates
the auditors cannot form an opinion on the fairness of presentation of the financial statements as a whole.
Under which of the following conditions can disclaimer of opinion never be issued?
the auditors have determined that the entity use the NIFO (next-in, first-out) inventory costing method
The auditing regarding subsequently discovered facts refers to knowledge obtained after
the date of the auditor's report
Which of the following statements is not true with respect to written representations?
the failure of management to furnish them is a significant scope limitation, resulting in either an adverse opinion or a disclaimer of opinion
A partner of the accounting firm who has not been involved in the audit performs an engagement quality review of documentation. This review usually focuses on
the fair presentation of the financial statements in conformity with GAAP.
Wolfe became the new auditor for Royal Corporation, succeeding C. Mason, who audited the financial statements last year. Wolfe needs to report on Royal's comparative financial statements and should disclose in the report an explanation about other auditors having audited the prior year
to describe the prior audit and the opinion but not name Mason as the predecessor auditor
Which of the following best describes the role of analytical procedures near the end of the audit engagement?
to provide an overall review of the financial information and assessment of the adequacy of evidence gathered during the audit engagement
On January 11, 2015, a major customer of Island Corporation declared bankruptcy as the result of an uninsured loss due to a major fire in their warehouse on January 8, 2015. As a result, a material accounts receivable from the customer was determined to be uncollectible. Long and Short, CPAs, would expect the client to
treat the loss as a subsequent event and provide a footnote about the loss in the 2014 financial statements.
The auditors determined that the entity is suffering financial difficulty and its going concern status is seriously in doubt. assuming that the entity adequately disclosed this matter in the financial statements, the auditors must choose between which of the following auditors' report alternatives?
unmodified opinion with reference to going-concern or disclaimer of opinion
