AUDITING Chapter 10, 11, 17 Multiple Choice Questions

Reasons for an Unqualified Report with an Explanatory paragraph

1. Lack of consistency 2. Opinion based in part on report of another auditor 3. Going Concern 4. Auditor performs an integrated audit with separate opinions

Unqualified Report

A "clean" audit report, indicating the auditor's opinion that a client's financial statements are fairly presented in accordance with agreed-upon criteria (e.g., GAAP).

MC 10-14. Which of the following internal controls would be most likely to deter the lapping of collections from customers? A.) Segregation of duties between receiving cash and posting the accounts receivable ledger. B.) Supervisory comparison of the daily cash summary with the sum of the cash receipts journal entries. C.) Authorization of write-offs of uncollectible accounts by a supervisor independent of the credit approval function. D.) independent internal verification of dates of entry in the cash receipts journal with dates of daily cash summaries.

A. Segregation of duties between receiving cash and posting the accounts receivable ledger.

MC 18-13. Eagle Company, a public company, had a computer failure and lost part of its financial data. As a result, the auditor was unable to obtain sufficient audit evidence relating to Eagle's inventory account. Assuming the inventory account is at least material, the auditor would most likely choose either A.) A qualified opinion or a disclaimer of opinion. B.) A qualified opinion or an adverse opinion. C.) An unqualified opinion with no explanatory paragraph or an unqualified opinion with an explanatory paragraph. D.)A qualified opinion with no explanatory paragraph or a qualified opinion with an explanatory paragraph.

A.) A Qualified opinion or a disclaimer of opinion

MC 17-19. Auditing standards primarily encourage which of the following conversations between the auditor and another party about financial reporting? A.) A conversation with those charged with governance to discuss matters pertaining to financial reporting. B.) A conversation with only management to discuss matters pertaining to financial reporting. C.) A conversation with the head of the entity's internal audit department and those charged with governance to discuss matters pertaining to financial reporting. D.) A conversation in which those charged with governance report on management's views on matters pertaining to financial reporting.

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

MC 18-14. Tech Company has appropriately disclosed an uncertainty due to pending litigation. However, the auditor was unable to satisfy herself that all pending litigation had been identified. The auditor's decision to issue a qualified opinion on Tech's financial statements would most likely result from A.) A lack of sufficient evidence. B.) An inability to estimate the amount of loss. C.) The entity's lack of experience with such litigation. D.) A lack of insurance coverage for possible losses from such litigation.

A.) A lack of sufficient evidence

MC 18-12. An auditor includes a separate paragraph in an otherwise unmodified financial statement audit report to emphasize that the entity being reported upon had significant transactions with related parties. The inclusion of this separate paragraph A.) Is appropriate and would not negate the unmodified opinion. B.) Is considered an "except for" qualification of the opinion. C.) Violates auditing standards if this information is already disclosed in footnotes to the financial statements. D.) Necessitates a revision of the opinion paragraph to include the phrase "with the foregoing explanation."

A.) Is Appropriate and would not negate the unmodified opinion.

MC 17-15. An auditor issued an audit report that was dual dated for a subsequent event occurring after the date on which the auditor has obtained sufficient appropriate audit evidence but before issuance of the financial statements. The auditor's responsibility for events occurring subsequent to the date on which the auditor has obtained sufficient appropriate audit evidence was A.) Limited to the specific event referenced. B.) Extended to include all events occurring since the date on which the auditor has obtained sufficient appropriate audit evidence. C.) Extended to subsequent events occurring through the date of issuance of the report. D.) Limited to events occurring up to the date of the last subsequent event referenced.

A.) Limited to the specific event referenced.

MC 17-17. Final analytical procedures are generally intended to A.) Provide the auditor with a final, overall evaluation of the relationships among financial statement balances. B.) Test transactions to corroborate management's financial statement assertions. C.) Gather evidence concerning account balances that have not yet been investigated. D.) Retest control activities that appeared to be ineffective during the assessment of control risk.

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

MC 17-18. Which of the following audit procedures is most likely to assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern? A.) Review compliance with the terms of debt agreements. B.) Review management's plans to dispose of assets. C.) Evaluate management's plans to borrow money or restructure debt. D.) Consider management's plans to reduce or delay expenditures.

A.) Review compliance with the terms of debt agreements.

MC 10-19. Which of the following is most likely to be detected by an auditor's review of an entity's sales cutoff? A.) Unrecorded sales for the year. B.) Lapping of year-end accounts receivable. C.) Excessive sales discounts. D.) Unauthorized goods returned for credit.

A.) Unrecorded Sales for the year

MC 11-23. When using confirmations to provide evidence about the completeness assertion for accounts payable, the appropriate population most likely would be A.) Vendors with whom the entity has previously done business. B.) Amounts recorded in the accounts payable subsidiary ledger. C.) Payees of checks drawn in the month after year-end. D.) Invoices filed in the entity's open invoice file.

A.) Venders with who the entity has previously done business.

MC 10-15. Smith Corporation has numerous customers. A customer file is maintained and includes a customer record with a name, an address, a credit limit, and an account balance. The auditor wishes to test this file to determine whether credit limits are being exceeded. The best procedure for the auditor to follow would be to A.) develop a program to compare credit limits with account balances and print out the details of any account with a balance exceeding its credit limit. B.) request a printout of a sample of account balances so that they can be individually checked against the respective credit limits. C.) develop test data that would cause some account balances to exceed the credit limit and determine if the system properly detects such situations. D.) request a printout of all account balances so that they can be manually checked against the credit limits.

A.) develop a program to compare credit limits with account balances and print out the details of any account with a balance exceeding its credit limit.

MC 18-17. When reporting on comparative financial statements, which of the following circumstances should ordinarily cause the auditor to change the previously issued opinion on the prior year's financial statements? A.) The prior year's financial statements are restated following the purchase of another company in the current year. B.) A departure from generally accepted accounting principles caused an adverse opinion on the prior year's financial statements, and those prior year statements have been properly restated. C.) A change in accounting principle causes the auditor to make a consistency modification in the current year's audit report. D.) A scope limitation caused a qualified opinion on the prior year's financial statements, but the current year's opinion is properly unqualified.

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

MC 10-18. If the number of day's sales in account receivable (365 days/receivables turnover) decreases significantly, which of the following assertions for accounts receivable most likely is violated? A.) Existence or Occurrence B.) Completeness C.) Rights and Obligations D.) Classification

B.) Completeness

MC 17-16. Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of any changes in internal control that might affect financial reporting between the end of the reporting period and the date of the auditor's report? A.) Review a fire insurance settlement during the subsequent period. B.) Examine relevant internal audit reports issued during the subsequent period. C.) Inquire of the entity's legal counsel concerning litigation, claims, and assessments arising after year-end. D.) Confirm bank accounts established after year-end.

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

MC 11-15. Internal control is strengthened when the quantity of merchandise ordered is omitted from the copy of the purchase order sent to the A.) Department that initiated the requisition. B.) Receiving department. C.) Purchasing agent. D.) Accounts payable department.

B.) Receiving department

MC 11-17. In a properly designed purchasing process, the same employee most likely would match vendors' invoices with receiving reports and A.) Post the detailed accounts payable records. B.) Recompute the calculations on vendors' invoices. C.) Reconcile the accounts payroll ledger. D.) Cancel vendors' invoices after payment.

B.) Recompute the calculations on vendor's invoices.

MC 18-10. In which of the following situations would an auditor ordinarily issue an unqualified/unmodified financial statement audit opinion with no explanatory (or emphasis-ofmatter/other-matter) paragraph? A.) The auditor wishes to emphasize that the entity had significant related-party transactions. B.) The auditor decides not to refer to the report of another auditor as a basis, in part, for the auditor's opinion. C.) The entity issues financial statements that present financial position and results of operations but omits the statement of cash flows. D.) The auditor has substantial doubt about the entity's ability to continue as a going concern, but the circumstances are fully disclosed in the financial statements.

B.) The Auditor decided not to refer to the report of another auditor as a basis, in part, for the auditor's opinion.

MC 18-19. Which of the following best describes the auditor's responsibility for "other information" included in the annual report to stockholders that contains financial statements and the auditor's report? A.) The auditor has no obligation to read the "other information." B.) The auditor has no obligation to corroborate the "other information" but should read the "other information" to determine whether it is materially consistent with the financial statements. C.) The auditor should extend the examination to the extent necessary to verify the "other information." D.) The auditor must modify the auditor's report to state that the other information "is unaudited" or "is not covered by the auditor's report."

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

MC 11-18. For effective internal control purposes, which of the following individuals should be responsible for mailing signed checks? A.) Receptionist. B.) Treasurer. C.) Accounts payable clerk. D.) Payroll clerk.

B.) Treasurer

MC 18-21. When an auditor is asked to express an opinion on an entity's rent and royalty revenues, he or she may A.) Not accept the engagement because to do so would be tantamount to agreeing to issue a piecemeal opinion. B.) Not accept the engagement unless also engaged to audit the full financial statements of the entity. C.) Accept the engagement, provided the auditor's opinion is expressed in a special report that clearly states that only these specific accounts were audited. D.) Accept the engagement, provided distribution of the auditor's report is limited to the entity's management.

C.) Accept the engagement, provided the auditor's opinion is expressed in a special report that clearly states that only these specific accounts were audited.

MC 11-13. In a properly designed accounts payable system, a voucher is prepared after the invoice, purchase order, requisition, and receiving report are verified. The next step in the system is A.) Cancelation of the supporting documents. B.) Entry of the check amount in the check register. C.) Entering of the voucher into the voucher register. D.) Approval of the voucher for payment.

C.) Entering of the voucher into the voucher register.

MC 18-15. In which of the following circumstances would an auditor usually choose between issuing a qualified opinion or a disclaimer of opinion on a client's financial statements? A.) Departure from generally accepted accounting principles. B.) Inadequate disclosure of accounting policies. C.) Inability of the auditor to obtain sufficient appropriate evidence. D.) Unreasonable justification for a change in accounting principle.

C.) Inability of the Auditor to obtain sufficient appropriate evidence

MC 17-13. An auditor would be most likely to identify a contingent liability by obtaining a(n) A.) Accounts payable confirmation. B.) Bank confirmation of the entity's cash balance. C.) Letter from the entity's general legal counsel. D.) List of subsequent cash receipts.

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

MC 10-22. An auditor should perform alternative procedures to substantive the existence of accounts receivable when A.) the collectability of the receivables is in doubt. B.) no reply to a negative confirmation request is received C.) no reply to a positive confirmation request is received D.) pledging of the receivables is probable

C.) No reply to a positive confirmation request is received.

MC 11-21. Purchase cutoff procedures should be designed to test whether all inventory A.) Purchased and received before the end of the year was paid for. B.) Ordered before the end of the year was received. C.) Purchased and received before the end of the year was recorded. D.) Owned by the entity is in the possession of the entity at the end of the year.

C.) Purchased and received before the end of the year was recorded.

MC 11-19. To determine whether accounts payable are complete, an auditor performs a test to verify that all merchandise received is recorded. The population of documents for this test consists of all A.) Vendor invoices. B.) Purchase orders. C.) Receiving reports. D.) Canceled checks.

C.) Receiving reports

MC 11-22. Which of the following procedures is least likely to be performed before the balance sheet date? A.) Test of internal control over cash. B.) Confirmation of receivables. C.) Search for unrecorded liabilities. D.) Observation of inventory.

C.) Search for unrecorded liabilities.

MC 18-20. When reporting on financial statements prepared on the basis of accounting used for income tax purposes, the auditor should include in the report a paragraph that A.) Emphasizes that the financial statements have not been examined in accordance with generally accepted auditing standards. B.) Refers to a tutorial that explains the income tax basis of accounting. C.) States that the income tax basis of accounting is a basis of accounting other than generally accepted accounting principles. D.) Justifies the use of the income tax basis of accounting.

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

MC 17-21. Which of the following events occurring after the issuance of a set of financial statements and the accompanying auditor's report would be most likely to cause the auditor to make further inquiries about the financial statements? A.) A technological development in the industry that could affect the entity's future ability to continue as a going concern. B.) The entity's sale of a subsidiary that accounts for 30 percent of the entity's consolidated sales. C.) The discovery of information regarding a contingency that existed before the financial statements were issued. D.) The final resolution of a lawsuit explained in a separate paragraph of the auditor's report.

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

MC 11-14. When goods are received, the receiving clerk should match the goods with A.) The purchase order and the requisition form. B.) The vendor invoice and the purchase order. C.) The vendor shipping document and the purchase order. D.) The vendor invoice and the vendor shipping document.

C.) The vender shipping document and the purchase order

MC 18-16. King, CPA, was engaged to audit the financial statements of Chang Company, a private company, after its fiscal year had ended. King neither observed the inventory count nor confirmed the receivables by direct communication with debtors but was satisfied that both were fairly stated after applying appropriate alternative procedures. King's financial statement audit report most likely contained a(n) A.) Qualified opinion. B.) Disclaimer of opinion. C.) Unmodified opinion. D.) Unmodified opinion with an emphasis-of-matter paragraph.

C.) Unmodified Opinion

MC 18-11. A public entity changed from the straight-line method to the declining balance method of depreciation for all newly acquired assets. This change has no material effect on the current year's financial statements but is reasonably certain to have a substantial effect in later years. The client's financial statements contain no material misstatements and the auditor concurs that this change is justified. If the change is disclosed in the notes to the financial statements, the auditor should issue a report with a(n) A.) "Except for," qualified opinion. B.) Adverse opinion. C.) Unqualified opinion. D.) Consistency modification.

C.) Unqualified Opinion

MC 10-23. In evaluating the adequacy of the allowance for doubtful accounts, an auditor most likely reviews the entity's aging of receivables to support management's financial statement assertion of A.) Completeness B.) rights and obligations C.) Valuation and allocation D.) Existence

C.) Valuation and Allocation

MC 10-20. Negative confirmation of accounts receivable is less effective than positive confirmation of accounts receivable because A.) Negative confirmations do not produce evidence that is statistically quantifiable. B.) A majority of recipients usually lack the willingness to respond objectively. C.) The auditor cannot infer that all non respondents have verified their account information D.) some recipients may report incorrect balances that require extensive follow up

C.) the auditor cannot infer that all non-respondent have verified their account information.

MC 11-16. Which of the following control activities is not usually performed in the accounts payable department? A.) Matching the vendor's invoice with the related receiving report. B.) Approving vouchers for payment by having an authorized employee sign the vouchers. C.) Indicating the asset and expense accounts to be debited. D.) Accounting for unused prenumbered purchase orders and receiving reports.

D.) Accounting for unused renumbered purchase orders and receiving reports

MC 17-14. An auditor should request that an audited entity send a letter of inquiry to those attorneys who have been consulted concerning litigation, claims, or assessments. The primary reason for this request is to provide A.) The opinion of a specialist as to whether loss contingencies are possible, probable, or remote. B.) A description of litigation, claims, and assessments that have a reasonable possibility of unfavorable outcome. C.) An objective appraisal of management's policies and procedures adopted for identifying and evaluating legal matters. D.) Corroboration of the information furnished by management concerning litigation, claims, and assessments.

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

MC 11-20. Which of the following audit procedures is best for identifying unrecorded trade accounts payable? A.) Examination of unusual relationships between monthly accounts payable balances and recorded cash payments. B.) Reconciliation of vendors' statements to the file of receiving reports to identify items received just prior to the balance sheet date. C.)Investigation of payables recorded just prior to and just subsequent to the balance sheet date to determine whether they are supported by receiving reports. D.) Review of cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period.

D.) Review of cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period.

MC 10-13. Which of the following controls is the most likely to help ensure that all credit revenue transactions of an entity are recorded? A.) The billing department supervisor sends a copy of each approved sales order to the credit department for comparison to the customer's authorized credit limit and current account balance. B.) The accounting department supervisor independently reconciles the accounts receivable subsidiary ledger to the accounts receivable control account each month. C.) The accounting department supervisor controls the mailing of monthly statements to customers and investigates any differences reported by customers. D.) The billing department supervisor matches pre-numbered shipping documents with entries in the sales journal.

D.) The billing department supervisor matches pre-numbered shipping documents with entries in the sales journal.

MC 10-16. Cash receipts from sales on account have been misappropriated. Which of the following acts would conceal this defalcation and be least likely to be detected by an auditor. A.) Understanding the cash receipts journal B.) Oversight the accounts receivable control account. C.) Oversight the accounts receivable subsidiary ledger. D.) Understanding the sales Journal

D.) Understanding the Sales journal

MC 10-17. If accounts receivable turnover (credit sales/receivables) was 7.1 times last year compared to only 5.6 times in the current year, it is possible that there were A.) unrecorded cash receipts last year B.) Fictitious sales in the current year C.) more through credit investigations made by the company late last year D.) unrecorded credit sales in the current year.

D.) Unrecorded credit sales in the current year.

MC 10-12. For the control activities to be effective, employees maintaining the accounts receivable subsidiary ledger should not also approve A.) Employee overtime wages B.) Credit grated to customers C.) Cash disbursements D.) Write-offs of customer accounts

D.) Write-offs of customer accounts

GAAP Departure

If the auditor qualifies a report for a GAAP departure, the report describes the nature and impact of the faulty accounting and indicates that the financial statements present fairly except for the effects of the departure.

Scope Limitation

Results from an inability to obtain sufficient appropriate evidence about some component of the financial statements. If the auditor decides to qualify a report for a scope limitation, the report describes why the limitation arose and indicates that the financial statements present fairly except for the possible effects of the limitation.

Disclaimer of Opinion

The auditor disclaims an opinion on the financial statements either because there is insufficient appropriate evidence to form an opinion on the overall financial statements or because there is a lack of independence. In a disclaimer the auditor explains the reasons for withholding an opinion and explicitly indicates that no opinion is expressed.

Adverse Opinion

The auditor issues an adverse opinion when the financial statements do not present fairly due to a GAAP departure that materially and pervasively affects the financial statements overall. In an adverse report the auditor explains the nature and size of the misstatement and states the opinion that the financial statements do not present fairly in accordance with GAAP.

Qualified opinion for Financial statements

The auditor qualifies the opinion when either a scope limitation or a specific departure from GAAP exists, but overall the financial statements present fairly in conformity with GAAP. Note that a qualified report always uses the words "except for."