5: Reporting

188. A CPA's report on agreed-upon procedures related to an entity's compliance with specified requirements should contain a. A statement of limitations on the use of the report. b. An opinion about whether management's assertion is fairly stated. c. Negative assurance that control risk has not been assessed. d. An acknowledgment of responsibility for the sufficiency of the procedures.

Correct Answer: A) A statement of limitations on the use of the report. Notes (a) The requirement is to identify the statement that is included in a CPA's report on agreed-upon procedures on management's assertion about an entity's compliance with specified requirements. Answer (a) is correct because such an agreed-upon procedures report includes a statement of limitations on the use of the report because it is intended solely for the use of specified parties. See AT 601 for information that should be included in such an agreed-upon procedures report. Answer (b) is incorrect because no "opinion" is included. Answer (c) is incorrect because a summary of findings, not negative assurance is provided. Answer (d) is incorrect because the CPA makes no representation regarding the sufficiency of procedures.

95. An independent accountant's report is based on a review of interim financial information. If this report is presented in a registration statement, a prospectus should include a statement clarifying that the a. Accountant's review report is not a part of the registration statement within the meaning of the Securities Act of 1933. b. Accountant assumes no responsibility to update the report for events and circumstances occurring after the date of the report. c. Accountant's review was performed in accordance with standards established by the Securities and Exchange Commission. d. Accountant obtained corroborating evidence to determine whether material modifications are needed for such information to conform with GAAP.

Correct Answer: A) Accountant's review report is not a part of the registration statement within the meaning of the Securities Act of 1933. Notes (a) The requirement is to identify the correct statement with respect to an independent accountant's review report on interim financial information presented in a registration statement. Answer (a) is correct because an accountant's review report is not a part of the registration statement within the meaning of Section 11 of the Securities Act of 1933. Answer (b) is incorrect because under certain conditions an accountant is required to update the report. Answers (c) and (d) are incorrect because the prospectus includes neither a statement that the review was performed in accordance with SEC standards, nor a statement that the accountant obtained corroborating evidence.

104. Comfort letters ordinarily are signed by the client's a. Independent auditor. b. Underwriter of securities. c. Audit committee. d. Senior management.

Correct Answer: A) Independent auditor. Notes (a) The requirement is to determine who ordinarily signs a comfort letter. Answer (a) is correct because a comfort letter (also known as letter to an underwriter) is sent by the independent auditor to the underwriter.

175. An auditor identified a material weakness in December. The client was informed and corrected it shortly after the "as of date" (December 31); the auditor agrees that the correction eliminates the material weakness as of January 31. The appropriate report under a PCAOB Standard 5 audit of internal control is a. Adverse. b. Unqualified. c. Unqualified with explanatory language relating to the material weakness. d. Qualified.

Correct Answer: A) Adverse. Notes (a) The requirement is to identify the appropriate audit report when a material weakness is corrected subsequent to year-end, but before the audit report is issued. Answer (a) is correct because PCAOB Standard 5 requires an adverse audit report when a material weakness exists at year-end, the "as of date." Answer (b) is incorrect because an unqualified opinion is not appropriate. Answer (c) is incorrect because an unqualified opinion with explanatory language is not adequate. Answer (d) is incorrect because a qualified opinion is not appropriate when a material weakness exists at year-end.

171. A control deficiency that is more than a significant deficiency is most likely to result in what form of audit opinion relating to internal control? a. Adverse. b. Qualified. c. Unqualified. d. Unqualified with explanatory language.

Correct Answer: A) Adverse. Notes (a) The requirement is to identify the appropriate report when a control deficiency that is more than a significant deficiency is identified. Answer (a) is correct because a control deficiency that is more than a significant deficiency is a material weakness, and because a material weakness leads to an adverse opinion on internal control. Answer (b) is incorrect because qualified opinions are not issued when a material weakness exists. Answer (c) is incorrect because an unqualified opinion is not issued when a material weakness exists. Answer (d) is incorrect because explanatory language added to an unqualified report is not appropriate when a material weakness exists.

122. A summary of findings rather than assurance is most likely to be included in a. Agreed-upon procedures report. b. Compilation report. c. Examination report. d. Review report.

Correct Answer: A) Agreed-upon procedures report. Notes (a) The requirement is to identify the type of report that is most likely to include a summary of findings rather than assurance. Answer (a) is correct because agreed-upon procedures reports include a summary of findings. Answer (b) is incorrect because a compilation report does not provide a summary of findings. Answer (c) is incorrect because an examination report includes positive assurance and not a summary of findings. Answer (d) is incorrect because a review report includes limited (negative) assurance, not a summary of findings.

153. Which of the following best describes a CPA's engagement to report on an entity's internal control over financial reporting? a. An attestation engagement to form an opinion on the effectiveness of its internal control. b. An audit engagement to provide negative assurance on the entity's internal control. c. A prospective engagement to project, for a period of time not to exceed one year, and report on the expected benefits of the entity's internal control. d. A consulting engagement to provide constructive advice to the entity on its internal control.

Correct Answer: A) An attestation engagement to form an opinion on the effectiveness of its internal control. Notes (a) The requirement is to identify the statement that best describes a CPA's engagement to report on an entity's internal control over financial reporting. Answer (a) is correct because the objective of an attestation engagement is to form an opinion on the effectiveness of internal control. Answer (b) is incorrect because no such negative assurance is provided based on an "audit" of the entity's internal control. Answer (c) is incorrect because such engagements do not project expected benefits of the entity's internal control. Answer (d) is incorrect because such engagements are attestation engagements, not consulting engagements.

195. Which of the following statements is a standard applicable to financial statement audits in accordance with Government Auditing Standards (the "Yellow Book")? a. An auditor should report on the scope of the auditor's testing of compliance with laws and regulations. b. An auditor should assess whether the entity has reportable measures of economy and efficiency that are valid and reliable. c. An auditor should report recommendations for actions to correct problems and improve operations. d. An auditor should determine the extent to which the entity's programs achieve the desired results.

Correct Answer: A) An auditor should report on the scope of the auditor's testing of compliance with laws and regulations. Notes (a) The requirement is to identify the correct statement with respect to a financial statement audit conducted in accordance with Government Auditing Standards (the "Yellow Book"). Answer (a) is correct because the auditor issues a report on compliance with laws and internal control, and a report on the financial information. Answer (b) is incorrect because a financial statement audit does not address economy and efficiency in the manner suggested. Answer (c) is incorrect because recommendations for actions to correct problems and improve operations are not ordinarily included. Answer (d) is incorrect because a financial statement audit does not address whether programs are achieving the desired results.

196. Which of the following statements is a standard applicable to financial statement audits in accordance with Government Auditing Standards (the "Yellow Book")? a. An auditor should report on the scope of the auditor's testing of internal controls. b. All instances of abuse, waste, and mismanagement should be reported to the audit committee. c. An auditor should report the views of responsible officials concerning the auditor's findings. d. Internal control activities designed to detect or prevent fraud should be reported to the inspector general.

Correct Answer: A) An auditor should report on the scope of the auditor's testing of internal controls. Notes (a) The requirement is to identify the correct statement with respect to a financial statement audit conducted in accordance with Government Auditing Standards (the "Yellow Book"). Answer (a) is correct because the auditor issues a report on compliance with laws and internal control, and a report on the financial information. Answer (b) is incorrect because not all instances of abuse, waste and mismanagement are so reported. Answer (c) is incorrect because the views of officials are not reported. Answer (d) is incorrect because internal control activities designed to detect or prevent fraud are not reported to the inspector general.

145. The auditor who audits the processing of transactions by a service organization may issue a report on controls I. Implemented II. Operating effectiveness a. Both I and II b. I only c. II only d. Neither I nor II

Correct Answer: A) Both I and II Notes (a) The requirement is to determine whether an auditor who audits the processing of transactions by a service organization may issue a report on either, or both, of whether controls have been implemented and control operating effectiveness. Answer (a) is correct because AU-C 402 indicates that such "service auditors" may issue either of the two types of reports.

172. Which of the following is most likely to be considered a material weakness in internal control for purposes of an internal control audit of an issuer (public) company? a. An ineffective oversight of financial reporting by the audit committee. b. Restatement of previously issued financial statements due to a change in accounting principles. c. Inadequate segregation of recordkeeping from accounting. d. Weaknesses in control activities.

Correct Answer: A) An ineffective oversight of financial reporting by the audit committee. Notes (a) The requirement is to identify the deficiency that is most likely to be considered a material weakness in internal control for purposes of an internal control audit of a public company. Answer (a) is correct because ineffective oversight of financial reporting by the audit committee is among the list of circumstances that PCAOB Standard 5 suggests are strong indicators of the existence of a material weakness. Restatement of previously issued financial statements as a result of a change in accounting principles is ordinarily not considered even a significant deficiency. Answer (c) is incorrect because the reply "inadequate segregation of recordkeeping from accounting" makes no real sense because accounting is involved with recordkeeping. Answer (d) is incorrect because control activity weaknesses often do not represent material weaknesses.

111. In connection with a proposal to obtain a new client, an accountant in public practice is asked to prepare a written report on the application of accounting principles to a specific transaction. The accountant's report should include a statement that a. Any difference in the facts, circumstances, or assumptions presented may change the report. b. The engagement was performed in accordance with Statements on Standards for Consulting Services. c. The guidance provided is for management use only and may not be communicated to the prior or continuing auditors. d. Nothing came to the accountant's attention that caused the accountant to believe that the accounting principles violated GAAP.

Correct Answer: A) Any difference in the facts, circumstances, or assumptions presented may change the report. Notes (a) The requirement is to determine an auditor's reporting responsibility when asked by a prospective client to render an opinion on the application of accounting principles to a specific transaction. Answer (a) is correct because AU-C 915 indicates that the report must include a statement that any difference in the facts, circumstances, or assumptions presented may change the report, as well as various other disclosures. Answer (b) is incorrect because the report indicates that the engagement was performed in accordance with AICPA standards, not Statements on Standards for Consulting Services. Answer (c) is incorrect because the report need not indicate that the guidance is for management use only and may not be communicated to the prior or continuing auditors. Answer (d) is incorrect because the report does not include negative assurance ("nothing came to our attention"). See AU-C 915 for performance and reporting requirements relating to reports on the application of accounting principles.

101. An auditor is engaged to report on selected financial data that are included in a document containing audited financial statements. Under these circumstances, the report on the selected data should a. Be limited to data derived from the audited financial statements. b. Be distributed only to senior management and the board of directors. c. State that the presentation is a financial reporting framework other than GAAP. d. Indicate that the data are not fairly stated in all material respects.

Correct Answer: A) Be limited to data derived from the audited financial statements. Notes (a) The requirement is to determine the appropriate response relating to selected financial data that are included in a document containing audited financial statements. Answer (a) is correct because the selected data should be limited to data derived from the audited financial statements. Answer (b) is incorrect because distribution of the report need not be limited to senior management and the board of directors. Answer (c) is incorrect because the selected data need not follow a financial reporting framework other than GAAP. Answer (d) is incorrect because the report will ordinarily state that the selected data are fairly stated in all material respects in relation to the consolidated financial statements.

47. In the first audit of a client, an auditor was not able to gather sufficient 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 would a. Be unable to express an opinion on the current year's results of operations and cash flows. b. Express a qualified opinion on the financial statements because of a client-imposed scope limitation. c. Withdraw from the engagement and refuse to be associated with the financial statements. d. Specifically state that the financial statements are not comparable to the prior year due to an uncertainty.

Correct Answer: A) Be unable to express an opinion on the current year's results of operations and cash flows. Notes (a) The requirement is to identify the type of opinion that should be issued on the financial statements when an auditor has been unable to obtain sufficient evidence relating to the consistent application of accounting principles between the current and prior year. Answer (a) is correct because the scope limitation will affect the year's beginning balances and thereby affect the current year's results of operations and cash flows. Answer (b) is incorrect because the year-end balance sheet will be unaffected by the scope limitation (any retained earnings misstatement of the preceding year will be offset in the current year). Answer (c) is incorrect because the auditor need not withdraw in such circumstances. Answer (d) is incorrect because this situation represents a scope limitation, and not an uncertainty.

92. A CPA is permitted to accept a separate engagement (not in conjunction with an audit of financial statements) to audit an entity's I. Schedule of accounts receivable II. Schedule of royalties a. Both I and II b. I only c. II only d. Neither I nor II

Correct Answer: A) Both I and II Notes (a) The requirement is to determine whether a CPA is permitted to accept an engagement to audit either a schedule of accounts receivable, a schedule of royalties, or both. Answer (a) is correct because auditors may audit "specified elements, accounts or items of a financial statement," including either a schedule of accounts receivable or a schedule of royalties. Answer (b) is incorrect because an auditor may audit a schedule of royalties. Answer (c) is incorrect because an auditor may audit a schedule of accounts receivable. Answer (d) is incorrect because an auditor may audit both a schedule of accounts receivable and a schedule of royalties.

119. Suitable criteria in an attestation engagement may be available I. Publicly II. In CPA's report a. Both I and II b. I only c. II only d. Neither I nor II

Correct Answer: A) Both I and II Notes (a) The requirement is to determine whether suitable criteria in an attestation engagement may be available publicly, and/or in the CPA's report. Answer (a) is correct because suitable criteria may be available publicly in the CPA's report, included with the subject matter or in the assertion, well understood by users (e.g., the distance between A and B is twenty feet) or available only to specified parties. Answers (b), (c), and (d) are all incorrect because they suggest that suitable criteria may not be available publicly, in the CPA's report, or both.

67. Before reissuing the prior year's auditor's report on the financial statements of a former client, the predecessor auditor should obtain a letter of representations from the I. Former client's management II. Successor auditor a. Both I and II b. I only c. II only d. Neither I nor II

Correct Answer: A) Both I and II Notes (a) The requirement is to determine whether the predecessor auditor should obtain a representation letter from management, the successor auditor, or both, before reissuing the prior year's audit record. Answer (a) is correct because the predecessor auditor should obtain a representation letter from both management and the successor auditor.

169. How large must the actual loss identified by the auditor be for a control deficiency to possibly be considered a material weakness? I. Immaterial II. Material a. Both I and II b. I only c. II only d. Neither I nor II

Correct Answer: A) Both I and II Notes (a) The requirement is to identify how large the actual loss identified must be for a control deficiency to possibly be considered a material weakness. Answer (a) is correct because a material weakness is determined by whether there is more than a remote likelihood of a material loss occurring due to the control deficiency; the actual loss identified need not be material. Answer (b) is incorrect because it suggests that a material amount identified will not be considered a material weakness. Answer (c) is incorrect because it states that when the identified amount is immaterial it is never a material weakness. Answer (d) is incorrect because it suggests that when an immaterial or material actual loss is discovered, the situation would not be assessed as a possible material weakness.

167. For an issuer (public) company audit of internal control, walkthroughs provide the auditor with primary evidence to I. Evaluate the effectiveness of the design of controls II. Confirm whether controls have been implemented a. Both I and II b. I only c. II only d. Neither I nor II

Correct Answer: A) Both I and II Notes (a) The requirement is to identify the circumstance(s) in which walk-throughs provide the auditor with primary evidence. A walk-through involves literally tracing a transaction from its origination through the company's information systems until it is reflected in the financial reports. Answer (a) is correct because a walk-through provides evidence to (1) confirm the auditor's understanding of the flow of transactions and the design of controls, (2) evaluate the effectiveness of the design of controls, and (3) to confirm whether controls have been implemented. Answer (b) is incorrect because walk-throughs provide the auditors with primary evidence to confirm whether controls have been implemented. Answer (c) is incorrect because walk-throughs provide primary evidence to evaluate the effectiveness of design in internal control. Answer (d) is incorrect both because walk-throughs provide primary evidence to (1) evaluate the effectiveness of the design of controls

116. A practitioner is issuing a standard unmodified examination report under the attestation standards. The CPA's conclusion may be on I. Subject matter II. Management's written assertion a. Both I and II b. I only c. II only d. Neither I nor II

Correct Answer: A) Both I and II Notes (a) The requirement is to identify the correct statement. When a standard unmodified examination report is being issued, that report may be upon the subject matter or the written assertion. Answers (b), (c), and (d) are all incorrect because they suggest that the report may not be upon either the subject matter, the written assertion, or both.

152. The framework most likely to be used by management in its internal control assessment under requirements of the Sarbanes-Oxley Act of 2002 is the a. COSO internal framework. b. COSO enterprise risk management framework. c. FASB 37 internal control definitional framework. d. AICPA internal control analysis manager.

Correct Answer: A) COSO internal framework. Notes (a) The requirement is to identify the most likely framework to be used by management in its internal control assessment. Answer (a) is correct as the COSO internal control framework is by far the most frequently used one. Answer (b) is incorrect because while a COSO enterprise risk management framework does exist, it is not ordinarily used by management in its internal control assessment. Answers (c) and (d) are incorrect because there is no such thing as a "FASB 37 internal control definitional framework" or an "AICPA internal control analysis manager."

19. Which of the following conditions or events most likely would cause an auditor to have substantial doubt about an entity's ability to continue as a going concern? a. Cash flows from operating activities are negative. b. Research and development projects are postponed. c. Significant related-party transactions are pervasive. d. Stock dividends replace annual cash dividends.

Correct Answer: A) Cash flows from operating activities are negative. Notes (a) The requirement is to identify the condition or event that is most likely to cause an auditor to have substantial doubt about an entity's ability to continue as a going concern. Answer (a) is correct because the professional standards (as well as logic) includes negative cash flows as one of its examples of such conditions and events. Answer (b) is incorrect because while the postponement of research and development projects may sometimes be due to extreme financial difficulties, often it is not. Answers (c) and (d) are incorrect because neither significant related-party transactions nor stock dividends need not indicate substantial doubt about an entity's ability to continue as a going concern. See AU-C 570 for information on an auditor's consideration of an entity's ability to continue as a going concern.

150. The AICPA has outlined auditor reports based on three services that may be provided on service organization controls (SOC). The type most likely to result in a restricted use report on controls at a service organization related to security, availability, processing integrity, confidentiality, and/or privacy is a. SOC 2. b. SOC SYS. c. SOC 6. d. SOC OC.

Correct Answer: A) SOC 2. Notes (a) The requirement is to identify the type of service organization control report most likely to result in a restricted use report on security, availability, processing integrity, confidentiality, and/or privacy. Answer (a) is correct as an SOC 2 report is restricted and on such content. Answers (b), (c) and (d) are all incorrect because no such reports exist.

161. Assume that a company has a control deficiency regarding the processing of cash receipts. Reconciliation of cash accounts by a competent individual otherwise independent of the cash function might make the likelihood of a significant misstatement due to the control deficiency remote. In this situation, reconciliation may be referred to as what type of control? a. Compensating. b. Preventive. c. Adjustive. d. Nonroutine.

Correct Answer: A) Compensating. Notes (a) The requirement is to identify the type of control that reconciliation of cash accounts represents. Answer (a) is correct in that it is a compensating control which supplements a basic underlying control, in this case basic information processing controls related to cash. Answer (b) is incorrect because a preventive control prevents errors or fraud from occurring. Answer (c) is incorrect because the term "adjustive" control is not ordinarily used. Answer (d) is incorrect because "nonroutine" is ordinarily considered a type of transaction (e.g., the year-end close process), not a type of control.

129. An accountant's compilation report on a financial forecast should include a statement that the a. Compilation does not include evaluation of the support of the assumptions underlying the forecast. b. Hypothetical assumptions used in the forecast are reasonable. c. Range of assumptions selected is one in which one end of the range is less likely to occur than the other. d. Prospective statements are limited to presenting, in the form of a forecast, information that is the accountant's representation.

Correct Answer: A) Compilation does not include evaluation of the support of the assumptions underlying the forecast. Notes (a) The requirement is to identify the statement that should be included in a compilation report on a financial forecast. Answer (a) is correct because the report should state that the compilation does not include evaluation of the support of the assumptions underlying the forecast. Answer (b) is incorrect because no such statement is included in a compilation report, and because hypothetical assumptions pertain to financial projections, not financial forecasts. Answer (c) is incorrect because the report makes no statement concerning the range of assumptions. Answer (d) is incorrect because the statement is not included in the report, and because the prospective statements are management's, not the accountant's, representation.

112. Blue, CPA, has been asked to render an opinion on the application of accounting principles to a specific transaction by an entity that is audited by another CPA. Blue, who previously has provided no services to the entity, may accept this engagement, but should a. Consult with the continuing CPA to obtain information relevant to the transaction. b. Report the engagement's findings to the entity's audit committee, the continuing CPA, and management. c. Disclaim any opinion that the hypothetical application of accounting principles conforms with generally accepted accounting principles. d. Notify the entity that the report is for the restricted use of management and outside parties who are aware of all relevant facts.

Correct Answer: A) Consult with the continuing CPA to obtain information relevant to the transaction. Notes (a) The requirement is to determine an auditor's responsibility when asked to render an opinion on the application of accounting principles to a specific transaction by an entity that is audited by another CPA. Answer (a) is correct because the accountant ordinarily must consult with the continuing CPA to attempt to obtain information relevant to the transaction; an exception to this rule exists under certain circumstances in which the accountant provides recurring services for the entity. Answer (b) is incorrect because the engagement's findings need not be reported to all of the groups listed—the entity's audit committee, the continuing CPA, and management. Answer (c) is incorrect because the accountant need not disclaim an opinion. Answer (d) is incorrect because the report's distribution need not be restricted to management and outside parties who are aware of all relevant facts.

144. Payroll Data Co. (PDC) processes payroll transactions for a retailer. Cook, CPA, is engaged to express an opinion on a description of PDC's internal controls implemented as of a specific date. These controls are relevant to the retailer's internal control, so Cook's report may be useful in providing the retailer's independent auditor with information necessary to plan a financial statement audit. Cook's report should a. Contain a disclaimer of opinion on the operating effectiveness of PDC's controls. b. State whether PDC's controls were suitably designed to achieve the retailer's objectives. c. Identify PDC's controls relevant to specific financial statement assertions. d. Disclose Cook's assessed level of control risk for PDC.

Correct Answer: A) Contain a disclaimer of opinion on the operating effectiveness of PDC's controls. Notes (a) The requirement is to identify a CPA's reporting responsibility when reporting on internal control implemented for a service organization that processes payroll transactions. Answer (a) is correct because since the CPA is only expressing an opinion on whether controls have been implemented, a disclaimer should be provided on operating effectiveness. Answer (b) is incorrect because no specific statement is made with respect to earlier objectives. Answer (c) is incorrect because controls relevant to financial statement assertions are not so identified. Answer (d) is incorrect because the assessed level of control risk is not disclosed. See AU-C 402 for information on processing of transactions by service organizations.

124. When an accountant examines projected financial statements, the accountant's report should include a separate paragraph that a. Describes the limitations on the usefulness of the presentation. b. Provides an explanation of the differences between an examination and an audit. c. States that the accountant is responsible for events and circumstances up to one year after the report's date. d. Disclaims an opinion on whether the assumptions provide a reasonable basis for the projection.

Correct Answer: A) Describes the limitations on the usefulness of the presentation. Notes (a) The requirement is to determine the information to be included in a separate paragraph included in an accountant's report on the examination of projected financial statements. Answer (a) is correct because AT 301 requires that such a report include a separate paragraph that describes the limitations on the usefulness of the presentation. See AT 301 for information that should be included in an examination report of prospective financial statements. Answer (b) is incorrect because the report includes no such statement attempting to distinguish between an examination and an audit. Answer (c) is incorrect because the report includes no such disclosure and because the accountant is not responsible for events and circumstances up to one year after the report's date. Answer (d) is incorrect because the report suggests that the assumptions do provide a reasonable basis.

146. Computer Services Company (CSC) processes payroll transactions for schools. Drake, CPA, is engaged to report on CSC's policies and procedures implemented as of a specific date. These policies and procedures are relevant to the schools' internal control, so Drake's report will be useful in providing the schools' independent auditors with information necessary to plan their audits. Drake's report expressing an opinion on CSC's policies and procedures implemented as of a specific date should contain a(n) a. Description of the scope and nature of Drake's procedures. b. Statement that CSC's management has disclosed to Drake all design deficiencies of which it is aware. c. Opinion on the operating effectiveness of CSC's policies and procedures. d. Paragraph indicating the basis for Drake's assessment of control risk.

Correct Answer: A) Description of the scope and nature of Drake's procedures. Notes (a) The requirement is to identify the proper information to be included in a service auditor's report on whether a client's controls have been implemented. Answer (a) is correct because such a report should include a description of the scope and nature of the client's procedures.

143. Dunn, CPA, is auditing the financial statements of Taft Co. Taft uses Quick Service Center (QSC) to process its payroll. Price, CPA, is expressing an opinion on a description of the controls implemented at QSC regarding the processing of its customers' payroll transactions. Dunn expects to consider the effects of Price's report on the Taft engagement. Price's report should contain a(n) a. Description of the scope and nature of Price's procedures. b. Statement that Dunn may assess control risk based on Price's report. c. Assertion that Price assumes no responsibility to determine whether QSC's controls are suitably designed. d. Opinion on the operating effectiveness of QSC's internal controls.

Correct Answer: A) Description of the scope and nature of Price's procedures. Notes (a) The requirement is to identify the information provided in a service auditor's report which includes an opinion on a description of controls implemented. Answer (a) is correct since such a report includes a description of the scope and nature of the CPA's procedures. Answers (b), (c), and (d) are all incorrect because they suggest information not included in such a report. See AU-C 402 for information on the audit of service organizations.

89. Delta Life Insurance Co. prepares its financial statements on an accounting basis insurance companies use pursuant to the rules of a state insurance commission. If Wall, CPA, Delta's auditor, discovers that the statements are not suitably titled, Wall should a. Disclose any reservations in an emphasis-of-matter paragraph and qualify the opinion. b. Apply to the state insurance commission for an advisory opinion. c. Issue a special statutory basis report that clearly disclaims any opinion. d. Explain in the notes to the financial statements the terminology used.

Correct Answer: A) Disclose any reservations in an emphasis-of-matter paragraph and qualify the opinion. Notes (a) The requirement is to determine the type of report to issue when a client who uses a special-purpose financial reporting framework has not appropriately titled its financial statements. Answer (a) is correct because any such exceptions or reservation should be described in an emphasis-of-matter paragraph and possibly a qualified (or adverse) opinion should be issued. Answer (b) is incorrect because no such application to the state insurance commission is necessary. Answer (c) is incorrect because a disclaimer of opinion is not appropriate when known misstatements exist. Answer (d) is incorrect because, as indicated, more than describing the terminology is necessary.

181. Which of the following is correct when applying a top-down approach to identify controls to test in an integrated audit? a. For certain assertions, strong entity-level controls may allow the auditor to omit additional testing beyond those controls. b. Starting at the top—controls over specific assertions—the auditor should link to major accounts and reporting items. c. The goal is to focus on details of accounting controls, while avoiding consideration of overall entity-level controls. d. The goal is to focus on all controls related to assertions, omitting consideration of controls related to the financial statements.

Correct Answer: A) For certain assertions, strong entity-level controls may allow the auditor to omit additional testing beyond those controls. Notes (a) The requirement is to identify a correct statement about applying a top-down approach to identify controls to test in an integrated audit. Answer (a) is correct because certain effective entity-level controls may allow the auditor to omit additional testing beyond those controls. Answer (b) is incorrect because starting with assertions does not represent starting at the top (starting at the top includes consideration of the financial statements and entity-level controls first). Answer (c) is incorrect because consideration of entity-level controls cannot be avoided. Answer (d) is incorrect because not all controls related to assertions need to be focused upon, and because one may not omit controls related to the financial statements.

9. A financial statement audit report issued for the audit of an issuer (public) company concludes that the financial statements follow a. Generally accepted accounting principles. b. Public Company Accounting Oversight Board standards. c. Generally accepted auditing standards. d. International accounting standards.

Correct Answer: A) Generally accepted accounting principles. Notes (a) The requirement is to determine the accounting principles that an issuer (public) company audit report refers to. Answer (a) is correct because the financial statements follow generally accepted accounting principles. Answer (b) is incorrect because, while the audit is performed in accordance with PCAOB standards, the financial statements do not follow those standards. Answer (c) is incorrect because the financial statements do not follow generally accepted auditing standards. Answer (d) is incorrect because the financial statements ordinarily follow generally accepted accounting principles, not International Accounting Standards.

202. In performing a financial statement audit in accordance with Government Auditing Standards, an auditor is required to report on the entity's compliance with laws and regulations. This report should a. State that compliance with laws and regulations is the responsibility of the entity's management. b. Describe the laws and regulations that the entity must comply with. c. Provide an opinion on overall compliance with laws and regulations. d. Indicate that the auditor does not possess legal skills and cannot make legal judgments.

Correct Answer: A) State that compliance with laws and regulations is the responsibility of the entity's management. Notes (a) The requirement is to identify the statement that should be included in an auditor's report on an entity's compliance with laws and regulations when performing an audit in accordance with Government Auditing Standards. Answer (a) is correct because such compliance reports require a statement that management is responsible for compliance with laws, regulations, contracts, and grants. See AU-C 806 for this requirement and others.

91. Field is an employee of Gold Enterprises. Hardy, CPA, is asked to express an opinion on Field's profit participation in Gold's net income. Hardy may accept this engagement only if a. Hardy also audits Gold's complete financial statements. b. Gold's financial statements are prepared in conformity with GAAP. c. Hardy's report is available for distribution to Gold's other employees. d. Field owns controlling interest in Gold.

Correct Answer: A) Hardy also audits Gold's complete financial statements. Notes (a) The requirement is to identify a requirement for a CPA to express an opinion on a profit participation plan relating to an entity's net income. Answer (a) is correct because if a specified element is, or is based upon, an entity's net income or stockholders' equity, the CPA should have audited the complete financial statements in order to express an opinion on the element. Answer (b) is incorrect because the financial statements need not be prepared in conformity with GAAP, as other bases of accounting may be followed. Answer (c) is incorrect because the report need not be made available for distribution to other employees. Answer (d) is incorrect because the individual in the profit participation plan need not own a controlling interest in the company.

168. Which is most likely to be a question asked of employee personnel during a walk-through in an audit of the internal control of an issuer (public) company? a. Have you ever been asked to override the process? b. Do you believe that you are underpaid? c. What do you do when you find a fraudulent transaction? d. Who trained you for this job?

Correct Answer: A) Have you ever been asked to override the process? Notes (a) The requirement is to identify the most likely question to be asked of employee personnel during a walkthrough. Answer (a) is correct because a question on whether an employee has ever been asked to override the process is included in the example questions to be asked by the auditor. Answer (b) is incorrect because auditors do not in general ask whether the employee believes he or she is underpaid. Answer (c) is incorrect because a direct question on fraudulent transactions like this, while possible, ordinarily is not suggested. Answer (d) is incorrect because the auditor will not usually ask who trained the person. Note that all four questions might be asked, but only one is among those recommended in Standard 5.

109. When unaudited financial statements are presented in comparative form with audited financial statements in a document filed with the Securities and Exchange Commission, such statements should be I. Marked as "unaudited" II. Withheld until audited III. Referred to in the auditor's report a. I only b. I and III c. II and III d. II only

Correct Answer: A) I only Notes (a) The requirement is to determine the proper treatment of unaudited financial statements presented in comparative form with audited financial statements in a document filed with the Securities and Exchange Commission. Answer (a) is correct because those statements should be marked "unaudited," not withheld until they are audited, and not referred to in the auditor's report.

14. Green, CPA, concludes that there is substantial doubt about JKL Co.'s ability to continue as a going concern. If JKL's financial statements adequately disclose its financial difficulties, Green's auditor's report should I. Include an emphasis-of-matter paragraph following the opinion paragraph II. Specifically use the words "going concern" III. Specifically use the words "substantial doubt" a. I, II, and III b. I and II c. I and III d. II and III

Correct Answer: A) I, II, and III Notes (a) The requirement is to determine an auditor's reporting responsibility when there is substantial doubt about a client's ability to continue as a going concern. Answer (a) is correct because the audit report must include an emphasis-of-matter paragraph following the opinion paragraph, and must use the terms "going concern" and "substantial doubt."

59. The auditor's responsibility section of a nonpublic company's auditor's report contains the following sentences: "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 a. Indicate a division of responsibility. b. Assume responsibility for the other auditor. c. Require a departure from an unmodified opinion. d. Are an improper form of reporting.

Correct Answer: A) Indicate a division of responsibility. Notes (a) The requirement is to determine the meaning of sentences added to the auditor responsibility section of an auditor's report that states that another auditor audited a portion of the entity. Answer (a) is correct because the professional standards provide that such a statement indicates a division of responsibility. Answer (b) is incorrect because when the other auditor is referred to the CPA, the CPA is not assuming responsibility for the other auditor. Answer (c) is incorrect because an unmodified opinion may be issued. Answer (d) is incorrect because the sentences are proper.

8. Which of the following best describes the reference to the expression "taken as a whole" in the PCAOB's fourth generally accepted auditing standard of reporting? a. It applies equally to a complete set of financial statements and to each individual financial statement. b. It applies only to a complete set of financial statements. c. It applies equally to each item in each financial statement. d. It applies equally to each material item in each financial statement.

Correct Answer: A) It applies equally to a complete set of financial statements and to each individual financial statement. Notes (a) The requirement is to determine the meaning of the expression "taken as a whole" in the fourth generally accepted auditing standard of reporting. The professional standards state that "taken as a whole" applies equally to a complete set of financial statements and to an individual financial statement.

33. Wilson, CPA, completed gathering sufficient appropriate audit evidence for the audit of Abco's December 31, 20X8 financial statements on March 6, 20X9. A subsequent event requiring adjustment to the 20X8 financial statements occurred on April 10, 20X9 and came to Wilson's attention on April 24, 20X9. If the adjustment is made without disclosure of the event, Wilson's report ordinarily should be dated a. March 6, 20X9. b. April 10, 20X9. c. April 24, 20X9. d. Using dual dating.

Correct Answer: A) March 6, 20X9. Notes (a) The requirement is to determine the appropriate date for an audit report when a subsequent event requiring adjustment of financial statements, without disclosure of the event, comes to the auditor's attention. The professional standards state that the date sufficient appropriate audit evidence has been collected should be used in such circumstances.

94. The objective of a review of interim financial information of a public entity (issuer) is to provide an accountant with a basis for reporting whether a. Material modifications should be made to conform with generally accepted accounting principles. b. A reasonable basis exists for expressing an updated opinion regarding the financial statements that were previously audited. c. Summary financial statements or pro forma financial information should be included in a registration statement. d. The financial statements are presented fairly in accordance with generally accepted accounting principles.

Correct Answer: A) Material modifications should be made to conform with generally accepted accounting principles. Notes (a) The requirement is to identify the objective of a review of interim financial information. Answer (a) is correct because the objective of a review of interim financial information is to provide a basis for reporting on whether material modification should be made for such information to conform with generally accepted accounting principles. Answer (b) is incorrect because no updated opinion is being issued. Answer (c) is incorrect because summary financial statements or pro forma financial information are not being considered in this question. Answer (d) is incorrect because the statements may or may not be presented in conformity with generally accepted accounting principles.

157. Which of the following is an accurate statement about internal control weaknesses? a. Material weaknesses are also control deficiencies. b. Significant deficiencies are also material weaknesses. c. Control deficiencies are also material weaknesses. d. All control deficiencies must be communicated to the audit committee.

Correct Answer: A) Material weaknesses are also control deficiencies. Notes (a) Answer (a) is correct because all material weaknesses are control deficiencies. Answer (b) is incorrect because a significant deficiency may or may not be a material weakness. Answer (c) is incorrect because not all control deficiencies are material weaknesses. Answer (d) is incorrect because only significant deficiencies and material weaknesses must be communicated.

3. March, CPA, is engaged by Monday Corp., a client, to audit the financial statements of Wall Corp., a company that is not March's client. Monday expects to present Wall's audited financial statements with March's auditor's report to 1st Federal Bank to obtain financing in Monday's attempt to purchase Wall. In these circumstances, March's auditor's report would usually be addressed to a. Monday Corp., the client that engaged March. b. Wall Corp., the entity audited by March. c. 1st Federal Bank. d. Both Monday Corp. and 1st Federal Bank.

Correct Answer: A) Monday Corp., the client that engaged March. Notes (a) The requirement is to determine the proper addressee of a report in a circumstance in which one company has hired a CPA to audit another company's financial statements. Answer (a) is correct because while audit reports are ordinarily addressed to the company whose financial statements are being audited, when a CPA audits the financial statements of a company that is not his or her client (as is the case here) the report is addressed to the company that hired the CPA.

106. When an accountant issues to an underwriter a comfort letter containing comments on data that have not been audited, the underwriter most likely will receive a. Negative assurance on capsule information. b. Positive assurance on supplementary disclosures. c. A limited opinion on pro forma financial statements. d. A disclaimer on prospective financial statements.

Correct Answer: A) Negative assurance on capsule information. Notes (a) The requirement is to determine the type of opinion or assurance provided by an accountant who issues a comfort letter containing comments on data that have not been audited. Answer (a) is correct because when procedures short of an audit are applied to information such as capsule information, a comfort letter will generally provide negative assurance. Answer (b) is incorrect because CPAs do not provide positive assurance on supplementary disclosures. Answer (c) is incorrect because no "limited opinion" is issued on pro forma or other information. Answer (d) is incorrect because no disclaimer will be included on the prospective financial statements.

49. Due to a scope limitation, an auditor disclaimed an opinion on the financial statements taken 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 a. Not appropriate because it may tend to overshadow the auditor's disclaimer of opinion. b. Not appropriate because the auditor is prohibited from reporting on only one basic financial statement. c. Appropriate provided the auditor's scope paragraph adequately describes the scope limitation. d. Appropriate provided the statement is in a separate paragraph preceding the disclaimer of opinion paragraph.

Correct Answer: A) Not appropriate because it may tend to overshadow the auditor's disclaimer of opinion. Notes (a) The requirement is to determine the propriety of including a statement that the current asset portion of an entity's balance sheet was fairly stated in an audit report that disclaims an opinion on the overall financial statements. Answer (a) is correct because expressions of opinion as to certain identified items in financial statements (referred to as "piecemeal opinions") should not be expressed when the auditor has disclaimed an opinion or has expressed an adverse opinion. Such opinions tend to overshadow or contradict the disclaimer or adverse opinion. Answer (b) is incorrect because an auditor may report on one basic financial statement. Answers (c) and (d) are incorrect because providing such assurance is not appropriate.

102. A registration statement filed with the SEC contains the reports of two independent auditors on their audits of financial statements for different periods. The predecessor auditor who audited the prior period financial statements generally should obtain a letter of representation from the a. Successor independent auditor. b. Client's audit committee. c. Principal underwriter. d. Securities and Exchange Commission.

Correct Answer: A) Successor independent auditor. Notes (a) The requirement is to determine a predecessor auditor's responsibility when the financial statements he or she audited are being included in an SEC registration statement filing. Answer (a) is correct because AU-C 920 requires that the predecessor (1) read pertinent portions of the document, and (2) obtain a letter of representation from the successor auditor.

1. The existence of audit risk is recognized by the statement in the auditor's standard report that the auditor a. Obtains reasonable assurance about whether the financial statements are free of material misstatement. b. Assesses the accounting principles used and also evaluates the overall financial statement presentation. c. Realizes some matters, either individually or in the aggregate, are important while other-matters are not important. d. Is responsible for expressing an opinion on the financial statements, which are the responsibility of management.

Correct Answer: A) Obtains reasonable assurance about whether the financial statements are free of material misstatement. Notes (a) The requirement is to identify the statement in the standard audit report that indicates the existence of audit risk. Answer (a) is correct because the existence of audit risk is recognized by the statement in the auditor's standard report that the auditor obtained "reasonable assurance." Answer (b) is incorrect because while the standard report does indicate that the CPA assesses the accounting principles used and the overall financial statement presentation, this does not indicate the existence of audit risk. Answer (c) is incorrect because while the standard report does indicate that the audit relates to whether the financial statements are free of material misstatement, it does not discuss materiality and the audit risk associated with materiality. Answer (d) is incorrect because while the financial statements are the responsibility of management and the CPA's responsibility is to express an opinion, the indication that the CPA expresses an opinion does not address audit risk and is less precise than the statement that the auditor obtains reasonable assurance.

118. When performing an attestation engagement, which of the following is least likely to be present? a. Practitioner's written assertion. b. Responsible party. c. Subject matter. d. Suitable criteria.

Correct Answer: A) Practitioner's written assertion. Notes (a) The requirement is to determine the element that is least likely to be present when a practitioner performs an attest engagement. Answer (a) is correct because while an assertion is generally present, it is from the responsible party, not from the practitioner. Answer (b) is incorrect because ordinarily there is a responsible party. Answers (c) and (d) are incorrect because both subject matter, and suitable criteria are required.

65. When reporting on comparative financial statements, an auditor ordinarily should change the previously issued opinion on the prior year's financial statements if the a. Prior year's financial statements are restated to conform with generally accepted accounting principles. b. Auditor is a predecessor auditor who has been requested by a former client to reissue the previously issued report. c. Prior year's opinion was unmodified and the opinion on the current year's financial statements is modified due to a lack of consistency. d. Prior year's financial statements are restated following a pooling of interests in the current year.

Correct Answer: A) Prior year's financial statements are restated to conform with generally accepted accounting principles. Notes (a) The requirement is to identify the circumstance in which an auditor reporting on comparative financial statements would ordinarily change the previously issued opinion on the prior year's financial statements. Answer (a) is correct because when an auditor has previously expressed a qualified or an adverse opinion on financial statements of a prior period and those financial statements have been restated, the auditor's updated report is changed. Answer (b) is incorrect because, ordinarily, the reissued report by a predecessor auditor will be the same as that originally issued. Answer (c) is incorrect because the prior year's opinion will remain unmodified if the current year's audit report is modified due to a lack of consistency. Answer (d) is incorrect because restatement of prior year's financial statements following a pooling of interest will not lead to a change in the previously issued opinion.

21. Which of the following audit procedures would most likely assist an auditor in identifying conditions and events that may indicate there could be substantial doubt about an entity's ability to continue as a going concern? a. Review compliance with the terms of debt agreements. b. Confirmation of accounts receivable from principal customers. c. Reconciliation of interest expense with debt outstanding. d. Confirmation of bank balances.

Correct Answer: A) Review compliance with the terms of debt agreements. Notes (a) The requirement is to identify the audit procedure most likely to assist an auditor in identifying conditions and events that may indicate there could be substantial doubt about an entity's ability to continue as a going concern. Answer (a) is correct because a review of compliance with terms of debt and loan agreements may reveal conditions of noncompliance due to poor financial condition. See the outline of AU-C 570 for a list of procedures that may identify such conditions and events. Answers (b), (c), and (d) are all incorrect because, while they might in some circumstances reveal a question concerning the company's ability to continue as a going concern, they are not considered to be as effective as answer (a).

72. An auditor concludes that there is a material inconsistency in the other information in an annual report to shareholders containing audited financial statements. If the auditor concludes that the financial statements do not require revision, but the client refuses to revise or eliminate the material inconsistency, the auditor may a. Revise the auditor's report to include a separate other matter paragraph describing the material inconsistency. b. Issue an "except for" qualified opinion after discussing the matter with the client's board of directors. c. Consider the matter closed since the other information is not in the audited financial statements. d. Disclaim an opinion on the financial statements after explaining the material inconsistency in a separate basis for disclaimer paragraph.

Correct Answer: A) Revise the auditor's report to include a separate other matter paragraph describing the material inconsistency. Notes (a) The requirement is to identify the auditor's reporting responsibility for a material inconsistency between the audited financial statements and the other information in an annual report to shareholders containing audited financial statements. Answer (a) is correct because AU-C 720 states that if a material inconsistency exists and the client refuses to revise the other information, the auditor should include an emphasis-of-matter paragraph that explains the inconsistency. The auditor may also withhold the use of the audit report or the auditor may withdraw from the engagement. Answer (b) is incorrect because the financial statements are not misstated. Answer (c) is incorrect because the auditor must review the other information to ensure that it is consistent with the financial statements. Answer (d) is incorrect because the financial statements are not misstated and therefore a disclaimer of opinion is inappropriate.

198. Although the scope of audits of recipients of federal financial assistance in accordance with federal audit regulations varies, these audits generally have which of the following elements in common? a. The auditor is to determine whether the federal financial assistance has been administered in accordance with applicable laws and regulations. b. The materiality levels are lower and are determined by the government entities that provided the federal financial assistance to the recipient. c. The auditor should obtain written management representations that the recipient's internal auditors will report their findings objectively without fear of political repercussion. d. The auditor is required to express both positive and negative assurance that illegal acts that could have a material effect on the recipient's financial statements are disclosed to the inspector general.

Correct Answer: A) The auditor is to determine whether the federal financial assistance has been administered in accordance with applicable laws and regulations. Notes (a) The requirement is to identify a common aspect of various types of audits of recipients of federal financial assistance in accordance with federal audit regulations. Answer (a) is correct because audits of recipients of federal financial assistance include reports on (1) the financial statements, and (2) a separate or combined report on internal control and on compliance with laws and regulations. Answer (b) is incorrect because materiality levels are not ordinarily lower or always determined by the governmental entity. Answer (c) is incorrect because the auditor need not obtain such written management representations. Answer (d) is incorrect because requirements for reporting illegal acts may vary depending upon the type of audit being performed. AU-C 806 provides requirements related to auditing entities that have received governmental financial assistance. In addition, guidance is provided by Government Auditing Standards (GAS), also referred to as the "Yellow Book," published by the Comptroller General of the United States.

69. A client is presenting comparative (two-year) financial statements. Which of the following is correct concerning reporting responsibilities of a continuing auditor? a. The auditor should issue one audit report that is on both presented years. b. The auditor should issue two audit reports, one on each year. c. The auditor should issue one audit report, but only on the most recent year. d. The auditor may issue either one audit report on both presented years, or two audit reports, one on each year.

Correct Answer: A) The auditor should issue one audit report that is on both presented years. Notes (a) The requirement is to identify the correct form of an audit report on comparative financial statements when a continuing auditor has audited the two years of financial statements being presented. Answer (a) is correct because one audit report should be issued that includes the years involved. Answer (b) is incorrect because one report, not two reports, should be issued. Answer (c) is incorrect because both years should be reported upon. Answer (d) is incorrect because auditors do not have the option of issuing two audit reports in this circumstance.

12. Mead, CPA, had substantial doubt about Tech Co.'s ability to continue as a going concern when reporting on Tech's audited financial statements for the year ended June 30, 20X1. That doubt has been removed in 20X1. What is Mead's reporting responsibility if Tech is presenting its financial statements for the year ended June 30, 20X2, on a comparative basis with those of 20X2? a. The emphasis-of-matter paragraph included in the 20X2 auditor's report should not be repeated. b. The emphasis-of-matter paragraph included in the 20X2 auditor's report should be repeated in its entirety. c. A different emphasis-of-matter paragraph describing Mead's reasons for the removal of doubt should be included. d. A different emphasis-of-matter paragraph describing Tech's plans for financial recovery should be included.

Correct Answer: A) The emphasis-of-matter paragraph included in the 20X2 auditor's report should not be repeated. Notes (a) The requirement is to determine an auditor's reporting responsibility when reporting on comparative financial statements in which the first year presented originally received a going concern modification on a matter that has now been resolved, thus removing the auditor's substantial doubt. Answer (a) is correct because if substantial doubt has been removed in the current period, the emphasis-of-matter paragraph included in the auditor's report on the financial statements of the prior period should not be repeated. Answers (b), (c), and (d) are all incorrect because they suggest the need for an emphasis-of-matter paragraph.

82. Before reporting on the financial statements of a US entity that have been prepared in conformity with another country's accounting principles, an auditor practicing in the US should a. Understand the accounting principles generally accepted in the other country. b. Be certified by the appropriate auditing or accountancy board of the other country. c. Notify management that the auditor is required to disclaim an opinion on the financial statements. d. Receive a waiver from the auditor's state board of accountancy to perform the engagement.

Correct Answer: A) Understand the accounting principles generally accepted in the other country. Notes (a) The requirement is to identify audit reporting requirements when reporting on financial statements of a US entity prepared in accordance with another country's accounting principles. Answer (a) is correct because AU-C 910 states that the auditor should understand the accounting principles generally accepted in the other country. Answer (b) is incorrect because the auditor does not have to obtain certification outside of the United States. Answer (c) is incorrect because the auditor does not have to disclaim an opinion. Answer (d) is incorrect because the auditor does not have to receive a waiver from the auditor's state board of accountancy.

27. Digit Co. uses the FIFO method of costing for its international subsidiary's inventory and LIFO for its domestic inventory. Under these circumstances, the auditor's report on Digit's financial statements should express an a. Unmodified opinion. b. Opinion qualified because of a lack of consistency. c. Opinion qualified because of a departure from GAAP. d. Adverse opinion.

Correct Answer: A) Unmodified opinion. Notes (a) The requirement is to determine the effect on an audit report of a client's decision to use differing inventory costing methods for various portions of its inventory. Answer (a) is correct because a standard unmodified opinion may ordinarily be issued (see AU-C 708 for a discussion of the consistency standard). Answer (b) is incorrect because there is no lack of consistency between accounting periods. Answer (c) is incorrect because there is no departure from GAAP. Answer (d) is incorrect because adverse opinions are only issued when a departure from GAAP exists that makes the financial statements misleading.

176. In an integrated audit, which of the following lead(s) to an adverse opinion on internal control? I. Material weaknesses II. Significant deficiencies a. Both I and II b. I only c. II only d. Neither I nor II

Correct Answer: B) I only Notes (b) The requirement is to specify whether material weaknesses and/or significant deficiencies lead to an adverse opinion on internal control in an integrated audit. Answer (b) is correct because only material weaknesses lead to an adverse opinion. Answer (a) is incorrect because significant deficiencies do not result in an adverse opinion. Answer (c) is incorrect because material weaknesses do result in adverse opinions but significant deficiencies do not. Answer (d) is incorrect because material weaknesses do result in adverse opinions.

62. When financial statements of a company that follows GASB standards would be misleading due to unusual circumstances depart from those standards, the auditor should explain the unusual circumstances in a separate paragraph and express an opinion that is a. Unmodified. b. Qualified. c. Adverse. d. Qualified or adverse, depending on materiality.

Correct Answer: A) Unmodified. Notes (a) The requirement is to determine the type of opinion to be issued when financial statements of an entity that follows GASB standards include a justified departure from GAAP. Answer (a) is correct because the auditor should issue an unmodified opinion and should include a separate emphasis-of-matter paragraph explaining the departure from GAAP. Answers (b), (c), and (d) are incorrect because when the auditor believes that the departure is justified, neither a qualified nor adverse opinion is appropriate.

125. An accountant may accept an engagement to apply agreed-upon procedures to prospective financial statements provided that a. Use of the report is restricted to the specified parties. b. The prospective financial statements are also examined. c. Responsibility for the adequacy of the procedures performed is taken by the accountant. d. Negative assurance is expressed on the prospective financial statements taken as a whole.

Correct Answer: A) Use of the report is restricted to the specified parties. Notes (a) The requirement is to identify the circumstance in which an accountant may accept an engagement to apply agreed-upon procedures to prospective financial statements. Answer (a) is correct because AT 301 states that an accountant may accept an engagement to apply agreed-upon procedures to prospective financial statements provided that (1) the specified parties involved have participated in establishing the nature and scope of the engagement and take responsibility for the adequacy of the procedures to be performed, (2) use of the report is to be restricted to specified parties involved, and (3) the prospective financial statements include a summary of significant assumptions. Answer (b) is incorrect because the prospective financial statements need not be examined. Answer (c) is incorrect because responsibility for the adequacy of the procedures is taken by the specified parties. Answer (d) is incorrect because a summary of findings may be provided based on the agreed-upon procedures.

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

Correct Answer: B) A direct reference to a separate paragraph disclosing the basis for the opinion. Notes (b) The requirement is to identify the information that should be included in the opinion paragraph of an audit report with an adverse opinion. Answer (b) is correct because the opinion paragraph should include a direct reference to a separate paragraph disclosing the basis for the opinion. Answer (a) is incorrect because the principal effects, if available, should be described in a separate emphasis-of-matter paragraph, and not in the opinion paragraph. Answer (c) is incorrect because while a separate paragraph provides a description of the substantive reasons for the adverse opinion, the opinion paragraph does not. Answer (d) is incorrect because neither an uncertainty nor a scope limitation leads to an adverse opinion.

140. A CPA's examination report relating to a WebTrust engagement is most likely to include a. An opinion on whether the site is "hackproof." b. An opinion on whether the site meets the WebTrust criteria. c. Negative assurance on whether the site is electronically secure. d. No opinion or other assurance, but a summary of findings relating to the website.

Correct Answer: B) An opinion on whether the site meets the WebTrust criteria. Notes (b) The requirement is to determine the type of opinion or assurance most likely to be included in a CPA's report relating to WebTrust engagements. Answer (b) is correct because the WebTrust examination report provides an opinion on whether the site meets the Trust Services criteria for one or more of the Trust Services Principles. Answer (a) is incorrect because no opinion on being "hackproof" is issued. Answer (c) is incorrect because negative assurance is not provided. Answer (d) is incorrect because an agreed-upon procedures engagement, not an examination engagement results in a summary of findings.

190. In auditing a not-for-profit entity that receives governmental financial assistance, the auditor has a responsibility to a. Issue a separate report that describes the expected benefits and related costs of the auditor's suggested changes to the entity's internal control. b. Assess whether management has identified laws and regulations that have a direct and material effect on the entity's financial statements. c. Notify the governmental agency providing the financial assistance that the audit is not designed to provide any assurance of detecting misstatements and fraud. d. Render an opinion concerning the entity's continued eligibility for the governmental financial assistance.

Correct Answer: B) Assess whether management has identified laws and regulations that have a direct and material effect on the entity's financial statements. Notes (b) The requirement is to determine an auditor's responsibility when auditing a not-for-profit entity that receives governmental financial assistance. Answer (b) is correct because AU-C 806 requires that the auditor assess whether management has identified laws and regulations that have a direct and material effect on the entity's financial statements; AU-C 806 also presents procedures to be followed in assessing such laws and regulations. Answer (a) is incorrect because such a separate report describing expected benefits and costs does not need to be issued. Answer (c) is incorrect because the CPA will not notify the governmental agency that the audit is not designed to provide assurance. Answer (d) is incorrect because the CPA does not express an opinion on the entity's continued eligibility for governmental financial assistance. AU-C 806 presents requirements relating to compliance auditing for governmental entities and recipients of governmental financial assistance.

204. In auditing compliance with requirements governing major federal financial assistance programs under the Single Audit Act, the auditor's consideration of materiality differs from materiality under generally accepted auditing standards. Under the Single Audit Act, materiality is a. Calculated in relation to the financial statements taken as a whole. b. Determined separately for each major federal financial assistance program. c. Decided in conjunction with the auditor's risk assessment. d. Ignored, because all account balances, regardless of size, are fully tested.

Correct Answer: B) Determined separately for each major federal financial assistance program. Notes (b) The requirement is to identify the auditor's proper measure of materiality for major federal financial assistance programs under the Single Audit Act. AU-C 806 requires that it be determined separately for each major program.

201. Which of the following is a specific documentation requirement that an auditor should follow when auditing in accordance with Government Auditing Standards? a. The auditor should obtain written representations from management acknowledging responsibility for correcting instances of fraud, abuse, and waste. b. Before the report is issued, evidence of supervisory review of the audit. c. The auditor should document the procedures that assure discovery of all illegal acts and contingent liabilities resulting from noncompliance. d. The auditor's working papers should contain a caveat that all instances of material misstatements and fraud may not be identified.

Correct Answer: B) Before the report is issued, evidence of supervisory review of the audit. Notes (b) The requirement is to determine a documentation requirement that an auditor should follow when auditing in accordance with (also referred to as the "Yellow Book"). Answer (b) is correct because Government Auditing Standards require documentation of supervisory review before the report is issued.

88. An auditor's report would refer to a basis of accounting other than GAAP in which of the following situations? a. Interim financial information of a publicly held company that is subject to a limited review. b. Compliance with aspects of regulatory requirements related to audited financial statements. c. Application of accounting principles to specified transactions. d. Limited use prospective financial statements such as a financial projection.

Correct Answer: B) Compliance with aspects of regulatory requirements related to audited financial statements. Notes (b) The requirement is to identify a situation in which an auditor's report would refer to a basis of accounting other than GAAP AU-C 800 defines reports on compliance with aspects of regulatory requirements related to audited financial statements as special-purpose financial reporting frameworks and requires such identification.

46. In which of the following situations would an auditor ordinarily choose between expressing a qualified opinion or an adverse opinion? a. The auditor did not observe the entity's physical inventory and is unable to become satisfied about its balance by other auditing procedures. b. Conditions that cause the auditor to have substantial doubt about the entity's ability to continue as a going concern are inadequately disclosed. c. There has been a change in accounting principles that has a material effect on the comparability of the entity's financial statements. d. The auditor is unable to apply necessary procedures concerning an investor's share of an investee's earnings recognized on the equity method.

Correct Answer: B) Conditions that cause the auditor to have substantial doubt about the entity's ability to continue as a going concern are inadequately disclosed. Notes (b) The requirement is to identify the situation in which an auditor will ordinarily choose between expressing a qualified opinion or an adverse opinion. Answer (b) is correct because departures from generally accepted accounting principles result in either a qualified opinion or an adverse opinion—such lack of disclosure is a departure from generally accepted accounting principles. Answer (a) is incorrect because the inability to observe the physical inventory and inability to become satisfied about its balance represents a scope limitation that will result in either a qualified opinion or a disclaimer of opinion. Answer (c) is incorrect because a change in accounting principles leads to an unmodified opinion with an emphasis-of-matter paragraph added to the report. Answer (d) is incorrect because inability to apply necessary procedures represents a scope limitation that will result in either a qualified opinion or a disclaimer of opinion.

20. Which of the following auditing procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern? a. Inspecting title documents to verify whether any assets are pledged as collateral. b. Confirming with third parties the details of arrangements to maintain financial support. c. Reconciling the cash balance per books with the cutoff bank statement and the bank confirmation. d. Comparing the entity's depreciation and asset capitalization policies to other entities in the industry.

Correct Answer: B) Confirming with third parties the details of arrangements to maintain financial support. Notes (b) The requirement is to identify the condition or event that might indicate to an auditor substantial doubt about an entity's ability to continue as a going concern. Answer (b) is correct because confirmation with related and third parties of the details of arrangements to provide or maintain financial support is a procedure that would assist an auditor in identifying a question concerning going concern status. See AU-C 570 for this and other such conditions and events indicating doubt about an entity's ability to continue as a going concern. Answer (a) is incorrect because the pledging of assets as collateral is a normal business transaction and it need not necessarily indicate a question of going concern status. Answer (c) is incorrect because reconciling the cash balances with the cutoff bank statement is an acceptable audit procedure, but will not normally identify a going concern question. Answer (d) is incorrect because comparing an entity's depreciation and asset capitalization policies will not normally indicate a question of going concern status.

13. When an auditor concludes there is substantial doubt about a continuing audit client's ability to continue as a going concern for a reasonable period of time, the auditor's responsibility is to a. Issue a qualified or adverse opinion, depending upon materiality, due to the possible effects on the financial statements. b. Consider the adequacy of disclosure about the client's possible inability to continue as a going concern. c. Report to the client's audit committee that management's accounting estimates may need to be adjusted. d. Reissue the prior year's auditor's report and add an emphasis-of-matter paragraph that specifically refers to "substantial doubt" and "going concern."

Correct Answer: B) Consider the adequacy of disclosure about the client's possible inability to continue as a going concern. Notes (b) The requirement is to determine the auditor's responsibility when s/he concludes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. Answer (b) is correct because when the auditor concludes there is substantial doubt, s/he should consider the possible effects on the financial statements, and the adequacy of the related disclosures. Answer (a) is incorrect because either an unmodified opinion with an emphasis-of-matter paragraph or a disclaimer is generally appropriate, not a qualified or adverse opinion. Answer (c) is incorrect because the substantial doubt of going concern status does not require adjusting accounting estimates. Answer (d) is incorrect because the prior year's audit report need not be reissued with an emphasis-of-matter paragraph.

142. A client's refusal to provide a written assertion in a Trust Services engagement is most likely to result in which of the following types of opinions? a. Adverse. b. Disclaimer. c. Qualified. d. Unmodified with explanatory language.

Correct Answer: B) Disclaimer. Notes (b) The requirement is to identify the most likely report when a client refuses to provide a written assertion in a Trust Services engagement. Answer (b) is correct because this represents a scope limitation, and client imposed scope limitations are most likely to result in a disclaimer of opinion. Answer (a) is incorrect because an adverse opinion is appropriate when a CPA believes that the information is so misstated as to be misleading. Answer (c) is incorrect because client imposed scope limitations generally result in disclaimers, not qualified opinions. Answer (d) is incorrect because an unmodified opinion is most likely not appropriate in such a circumstance.

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

Correct Answer: B) Each year that the financial statements initially reflecting the change are presented. Notes (b) The requirement is to determine auditor reporting responsibility when management does not provide reasonable justification for a change in accounting principle and presents comparative financial statements. Answer (b) is correct because the auditor should continue to express his/her exception with the financial statements for the year of change as long as they are presented and reported on. Answer (a) is incorrect because the auditor must express his/her exception for as long as the financial statements for the year of change are presented and reported on. Answer (c) is incorrect because the auditor need not qualify the report until management changes back to the accounting principle formerly used. Answer (d) is incorrect because the qualification is necessary despite the fact that the principle is generally accepted.

133. Given one or more hypothetical assumptions, a responsible party may prepare, to the best of its knowledge and belief, an entity's expected financial position, results of operations, and changes in financial position. Such prospective financial statements are known as a. Pro forma financial statements. b. Financial projections. c. Partial presentations. d. Financial forecasts.

Correct Answer: B) Financial projections. Notes (b) The requirement is to identify the type of prospective financial statement that includes one or more hypothetical ("what if?") assumptions. Answer (b) is correct because financial projections include one or more hypothetical assumptions. Answer (a) is incorrect because pro forma financial presentations are designed to demonstrate the effect of a future or hypothetical transaction by showing how it might have affected the historical financial statements if it had been consummated during the period covered by those statements. Answer (c) is incorrect because partial presentations are presentations that do not meet the minimum presentation guidelines of AT 301. Answer (d) is incorrect because financial forecasts present, to the best of the responsible party's knowledge and belief, an entity's expected financial position, results of operations, and changes in financial information.

117. Conditions exist that result in a material deviation from the criteria against which the subject matter was evaluated during an examination. The CPA's conclusion may be on I. Subject matter II. Written assertion a. Both I and II b. I only c. II only d. Neither I nor II

Correct Answer: B) I only Notes (b) The requirement is to determine whether a CPA's conclusion may be upon the subject matter, the written assertion, or both when conditions exist that result in a material deviation from the criteria against which the subject matter was evaluated during an examination. Answer (b) is correct because in such circumstances the conclusion should be directly upon the subject matter. Answer (a) is incorrect because it suggests that the conclusion may be upon the written assertion. Answer (c) is incorrect because it states that the conclusion may not be upon the subject matter and may be upon the written assertion. Answer (d) is incorrect because it states that the conclusion may not be upon the subject matter.

63. A client follows US GAAP for its domestic operations and foreign GAAP for a foreign subsidiary. The foreign subsidiary is audited by a component auditor, while the group auditor audits the remainder of the corporation and issues an audit report on consolidated operations. Which auditor(s) is (are) responsible for evaluating the appropriateness of the adjustment of the foreign GAAP statements to US GAAP? I. Group auditor II. Component auditor a. Both I and II b. I only c. II only d. Neither I nor II

Correct Answer: B) I only Notes (b) The requirement is to determine which auditor(s) is (are) responsible for evaluating the appropriateness of the adjustment of foreign financial statements consolidated with US GAAP financial statements in a group audit situation. Answer (b) is correct because the group auditor is responsible. Answer (a) is incorrect because the component auditor is not responsible. Answer (c) is incorrect because the group auditor is responsible and the component auditor is not. Answer (d) is incorrect because the group auditor is responsible.

177. In an integrated audit, what must the auditor communicate to the audit committee? I. Known material weaknesses II. All control deficiencies a. Both I and II b. I only c. II only d. Neither I nor II

Correct Answer: B) I only Notes (b) The requirement is to specify what types of deficiencies must be communicated by the auditor to the audit committee. Answer (b) is correct because the auditor must communicate material weaknesses and other significant deficiencies, but not all control deficiencies. Answer (a) is incorrect because control deficiencies that are not significant need not be communicated to the audit committee (unless the auditor has made an agreement to communicate them). Answers (c) and (d) are incorrect because known material weaknesses must be communicated to the audit committee and control deficiencies that are not significant deficiencies need not be communicated.

192. A governmental audit may extend beyond an examination leading to the expression of an opinion on the fairness of financial presentation to include I. Program results II. Compliance III. Economy and efficiency a. I and II b. I, II, and III c. II and III d. I and III

Correct Answer: B) I, II, and III Notes (b) The requirement is to determine the proper scope of a governmental audit. The General Accounting Office's "Yellow Book" suggests that in addition to financial statements, such an audit may include consideration of (1) program results, (2) compliance with laws and regulations, and (3) economy and efficiency.

50. Park, CPA, was engaged to audit the financial statements of Tech Co., a new client, for the year ended December 31, 2009. Park obtained sufficient audit evidence for all of Tech's financial statement items except Tech's opening inventory. Due to inadequate financial records, Park could not verify Tech's January 1, 2009 inventory balances. Park's opinion on Tech's 2009 financial statements most likely will be I. Balance sheet II. Income statement a. I. Disclaimer ; II. Disclaimer b. I. Unmodified ; II. Disclaimer c. I. Disclaimer ; II. Adverse d. I. Unmodified ; II. Adverse

Correct Answer: B) I. Unmodified ; II. Disclaimer Notes (b) The requirement is to identify the type of opinion that should be issued on the balance sheet and the income statement when an auditor did not observe a client's taking of the beginning physical inventory and was unable to become satisfied about its accuracy by using other auditing procedures. Answer (b) is correct because the scope limitation will not affect the year-end balance sheet account balances. However, because evidence with respect to the beginning inventory is lacking, verification of cost of goods sold, an income statement element, is impossible. Although year-end retained earnings will not be affected, both the current and prior years' retained earnings statements will be affected (by an offsetting amount) by the cost of goods sold misstatement. If no other problems arise, the auditor will be able to issue an unmodified opinion on the balance sheet and a disclaimer on the income statement (and on the retained earnings statement). Answer (a) is incorrect because an unmodified opinion may be issued on the balance sheet. Answer (c) is incorrect because an unmodified opinion may be issued on the balance sheet with a disclaimer on the income statement. Answer (d) is incorrect because a disclaimer should be issued on the income statement.

193. When auditing an entity's financial statements in accordance with Government Auditing Standards (the "Yellow Book"), an auditor is required to report on I. Noteworthy accomplishments of the program. II. The scope of the auditor's testing of internal controls. a. I only b. II only c. Both I and II d. Neither I nor II

Correct Answer: B) II only Notes (b) The requirement is to identify whether an auditor performing an audit in accordance with Government Auditing Standards (the "Yellow Book") is required to report on noteworthy accomplishments of the program, the scope of the auditor's testing of internal controls, or both. Answer (b) is correct because the "Yellow Book" requires reporting only upon the scope of the auditor's testing of internal controls. Answers (a), (c), and (d) all include an incorrect combination of reporting replies.

194. When auditing an entity's financial statements in accordance with Government Auditing Standards (the "Yellow Book"), an auditor is required to report on I. Recommendations for actions to improve operations. II. The scope of the auditor's tests of compliance with laws and regulations. a. I only b. II only c. Both I and II d. Neither I nor II

Correct Answer: B) II only Notes (b) The requirement is to identify whether an auditor performing an audit in accordance with Government Auditing Standards (the "Yellow Book") is required to report on recommendations for actions to improve operations, the scope of tests of compliance with laws and regulations, or both. Answer (b) is correct because the "Yellow Book" requires reporting upon the scope of the auditor's tests of compliance with laws and regulations. Answers (a), (c), and (d) all include an incorrect combination of reporting replies.

184. When an independent auditor reports on internal control based on criteria established by governmental agencies, the report should a. Not include the agency's name in the report. b. Indicate matters covered by the study and whether the auditor's study included tests of controls with the procedures covered by the study. c. Not express a conclusion based on the agency's criteria. d. Assume responsibility for the comprehensiveness of the criteria established by the agency and include recommendations for corrective action.

Correct Answer: B) Indicate matters covered by the study and whether the auditor's study included tests of controls with the procedures covered by the study. Notes (b) The requirement is to describe the contents of a report on the study of internal control that is based on criteria established by governmental agencies. Answer (b) is correct because the report should indicate matters covered by the consideration and whether the auditor's consideration included tests of controls with the procedures covered by his/her consideration. Additionally, the report should describe the objectives and limitations of internal control and the accountant's evaluation thereof; state the accountant's conclusion, based on the agency's criteria; and describe the purpose of the report and state that it should not be used for any other purpose. Answer (a) is incorrect because the agency's name should be included. Answer (c) is incorrect because a conclusion may be made relative to the agency's criteria. Answer (d) is incorrect because the accountant should not assume responsibility for the comprehensiveness of the criteria.

103. Which of the following statements is correct concerning letters for underwriters, commonly referred to as comfort letters? a. Letters for underwriters are required by the Securities Act of 1933 for the initial public sale of registered securities. b. Letters for underwriters typically give negative assurance on unaudited interim financial information. c. Letters for underwriters usually are included in the registration statement accompanying a prospectus. d. Letters for underwriters ordinarily update auditors' opinions on the prior year's financial statements.

Correct Answer: B) Letters for underwriters typically give negative assurance on unaudited interim financial information. Notes (b) The requirement is to identify the statement that is correct concerning letters for underwriters. Answer (b) is correct because letters for underwriters typically provide negative assurance on unaudited interim financial information. Answer (a) is incorrect because letters for underwriters are not required by the Securities Act of 1933. Answer (c) is incorrect because letters for underwriters are not included in registrations statements. Answer (d) is incorrect because auditors' opinions on the prior year's financial statement are not updated.

90. Financial information is presented in a printed form that prescribes the wording of the independent auditor's report. The form is not acceptable to the auditor because the form calls for statements that are inconsistent with the auditor's responsibility. Under these circumstances, the auditor most likely would a. Withdraw from the engagement. b. Reword the form or attach a separate report. c. Express a qualified opinion with an explanation. d. Limit distribution of the report to the party who designed the form.

Correct Answer: B) Reword the form or attach a separate report. Notes (b) The requirement is to identify an auditor's reporting responsibility when a printed form prescribes the wording of the independent auditor's report that will accompany it, but that wording is not acceptable to the auditor. AU-C 800 suggests that the auditor reword the report (or attach a separate report) in this situation.

187. Mill, CPA, was engaged by a group of royalty recipients to apply agreed-upon procedures to financial data supplied by Modern Co. regarding Modern's written assertion about its compliance with contractual requirements to pay royalties. Mill's report on these agreed-upon procedures should contain a(n) a. Disclaimer of opinion about the fair presentation of Modern's financial statements. b. List of the procedures performed (or reference thereto) and Mill's findings. c. Opinion about the effectiveness of Modern's internal control activities concerning royalty payments. d. Acknowledgment that the sufficiency of the procedures is solely Mill's responsibility.

Correct Answer: B) List of the procedures performed (or reference thereto) and Mill's findings. Notes (b) The requirement is to identify the information provided in an agreed-upon procedures report on compliance with contractual requirements to pay royalties. Answer (b) is correct because agreed-upon procedures reports include a list of the procedures performed (or reference thereto) and findings. Answer (a) is incorrect because no such disclaimer of opinion is provided in an agreed-upon procedures report. Answer (c) is incorrect because no opinion is included in an agreed-upon procedures report. Answer (d) is incorrect because an agreedupon procedures report includes a statement disclaiming an opinion on the sufficiency of procedures, not an acknowledgement of the sufficiency of the procedures. See AT 201 for guidance on agreed-upon procedures engagements.

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

Correct Answer: B) Management does not provide reasonable justification for a change in accounting principles. Notes (b) The requirement is to identify the circumstance in which a disclaimer of opinion is not appropriate. Answer (b) is correct because when management does not provide reasonable justification of a change in accounting principles either a qualified or an adverse opinion is appropriate, not a disclaimer. Answers (a), (c), and (d) are all incorrect because they represent scope limitations that lead to either a qualified opinion or a disclaimer of opinion.

28. In the first audit of a new client, an auditor was able to extend auditing procedures to gather sufficient evidence about consistency. Under these circumstances, the auditor should a. Not report on the client's income statement. b. Not refer to consistency in the auditor's report. c. State that the consistency standard does not apply. d. State that the accounting principles have been applied consistently.

Correct Answer: B) Not refer to consistency in the auditor's report. Notes (b) The requirement is to identify an auditor's reporting responsibility when performing a first audit of a new client and when the auditor was able to extend auditing procedures to gather sufficient evidence about consistency. Answer (b) is correct because, when the auditor has obtained assurance as to the consistency of application of accounting principles between the current and preceding year, no mention of consistency is included in the audit report. Answer (a) is incorrect because the auditor may report on the client's income statement. Answer (c) is incorrect because the consistency standard does apply. Answer (d) is incorrect because the auditor does not refer to consistency when accounting principles have been applied consistently.

93. When an independent CPA has reviewed the interim financial statements of a public client, which procedure is least likely to have been performed? a. Obtaining written representations from management for all interim financial information presented. b. Observing the interim count of inventory. c. Reading the financial statements for obvious material misstatements. d. Performing analytical procedures related to sales.

Correct Answer: B) Observing the interim count of inventory. Notes (b) The requirement is to identify the least likely procedure included in an interim review of the financial statements of a public client. Answer (b) is correct because an interim review ordinarily does not include such substantive tests of balances. Answer (a) is incorrect because a CPA should obtain such written representations. Answer (c) is incorrect because the CPA will read the financial statements for obvious material misstatements. Answer (d) is incorrect because the primary procedures included in such a review are analytical procedures and inquiries.

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

Correct Answer: B) Preceding the opinion paragraph. Notes (b) The requirement is to determine the proper placement of a basis for modification paragraph disclosing the substantive reasons for expressing an adverse opinion. AU-C 705 requires that such paragraphs precede the opinion paragraph.

205. Kent is auditing an entity's compliance with requirements governing a major federal financial assistance program in accordance with the Single Audit Act. Kent detected noncompliance with requirements that have a material effect on that program. Kent's report on compliance should express a(n) a. Unmodified opinion with a separate emphasis-of-matter paragraph. b. Qualified opinion or an adverse opinion. c. Adverse opinion or a disclaimer of opinion. d. Limited assurance on the items tested.

Correct Answer: B) Qualified opinion or an adverse opinion. Notes (b) The requirement is to identify the appropriate compliance report under the Single Audit Act when a CPA has detected noncompliance with requirements that have a material effect on that program. AU-C 806 states that under such circumstances the auditor should express a qualified or adverse opinion.

151. The internal control provisions of the Sarbanes-Oxley Act of 2002 apply to which companies in the United States? a. All companies. b. SEC registrants. c. All issuer (public) companies and nonissuer (nonpublic) companies with more than $100,000,000 of net worth. d. All nonissuer companies.

Correct Answer: B) SEC registrants. Notes (b) The requirement is to identify the type of companies to which the internal control provisions of the Sarbanes-Oxley Act of 2002 apply. Answer (b) is correct because the provisions apply to public companies that are registered with the Securities and Exchange Commission. Answer (a) is incorrect because nonissuer companies are not directly affected by the control provisions. Answer (c) is incorrect; there is no $100,000,000 requirement. Answer (d) is incorrect because nonissuer companies are not directly affected by the internal control provisions of the Act.

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

Correct Answer: B) Qualified opinion or an adverse opinion. Notes (b) The requirement is to identify the appropriate types of audit reports when an illegal act with a material effect on the financial statements has not been properly accounted for or disclosed. Answer (b) is correct because omission of required disclosures, a departure from generally accepted accounting principles, leads to either a qualified or an adverse opinion. Answer (a) is incorrect because a disclaimer of opinion is not appropriate when the auditor knows of such misstatements. Answer (c) is incorrect because neither a disclaimer of opinion nor an unmodified opinion with a separate emphasis-of-matter paragraph is appropriate. Answer (d) is incorrect because an unmodified opinion with a separate emphasis-of-matter paragraph is not appropriate.

44. If a publicly held company issues financial statements that purport to present its financial position and results of operations but omits the statement of cash flows, which of the following types of opinion is most likely to be appropriate? a. Disclaimer of opinion. b. Qualified opinion. c. Review report with negative assurance. d. Unmodified opinion with a separate emphasis-of-matter paragraph.

Correct Answer: B) Qualified opinion. Notes (b) The requirement is to determine the appropriate report modification that results when the management of a publicly held company issues financial statements that purport to present its financial position and results of operations but omits the statement of cash flows. Answer (b) is correct because failure to include a statement of cash flows in such a circumstance is considered a departure from GAAP and the appropriate choice here is a qualified opinion.

173. Inability to evaluate internal control due to a circumstance-caused scope limitation relating to a significant account in a Sarbanes-Oxley 404 internal control audit is most likely to result in a(n) a. Adverse opinion. b. Qualified opinion. c. Unqualified opinion with explanatory language. d. All of the above are equally likely.

Correct Answer: B) Qualified opinion. Notes (b) The requirement is to identify the most appropriate report when a circumstance-caused scope limitation results in inability to evaluate internal control for a significant account involved in the audit. Answer (b) is correct because PCAOB Standard 5 indicates that either a qualified opinion or a disclaimer is appropriate, and because the disclaimer is not listed as an option. Answer (a) is incorrect because an adverse opinion is not appropriate. Answer (c) is incorrect because an unqualified opinion with explanatory language is not appropriate when the auditor is unable to evaluate internal control for a significant account. Answer (d) is incorrect because answers (a) and (c) are not appropriate.

97. Which of the following procedures ordinarily should be applied when an independent accountant conducts a review of interim financial information of a publicly held entity? a. Verify changes in key account balances. b. Read the minutes of the board of directors' meetings. c. Inspect the open purchase order file. d. Perform cut-off tests for cash receipts and disbursements.

Correct Answer: B) Read the minutes of the board of directors' meetings. Notes (b) The requirement is to identify the procedure that would ordinarily be applied when an accountant conducts a review of the interim financial information of a publicly held entity. Answer (b) is correct because the accountant will ordinarily read the minutes of meetings of stockholders, the board of directors, and committees of the board of directors to identify actions that may affect the interim financial information. Answers (a), (c), and (d) are all incorrect because they represent verification procedures typically beyond the scope of a review of interim financial information.

203. In reporting under Government Auditing Standards, an auditor most likely would be required to communicate management's misappropriation of assets directly to a federal inspector general when the fraudulent activities are a. Concealed by management by circumventing specific internal controls designed to safeguard those assets. b. Reported to the entity's governing body and the governing body fails to make a required report to the federal inspector general. c. Accompanied by fraudulent financial reporting that results in material misstatements of asset balances. d. Perpetrated by several levels of management in a scheme that is likely to continue in future years.

Correct Answer: B) Reported to the entity's governing body and the governing body fails to make a required report to the federal inspector general. Notes (b) The requirement is to determine when an auditor reporting under would most likely be required to communicate management's misappropriation of assets directly to a federal inspector general. Answer (b) is correct because Government Auditing Standards requires that when a governing body fails to make a required report on such acts the auditors should communicate the matter to the external body specified in the law or regulation. Answer (a) is incorrect because such concealment will not necessarily lead to communication to a federal inspector general. Answer (c) is incorrect because material misstatement does not necessarily lead to such communication. Answer (d) is incorrect because the expected duration of the scheme is not what leads to reporting to a federal inspector general.

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

Correct Answer: B) Responsibility for the proper accounting treatment rests with the preparers of the financial statements. Notes (b) The requirement is to identify the requirement relating to a CPA's report when reporting on the application of accounting principles to a specific transaction. Answer (b) is correct because AU-C 915 requires that the report include a statement that responsibility for the proper accounting treatment rests with the preparers of the financial statements. Answer (a) is incorrect because the report states that the engagement was performed in accordance with applicable AICPA standards, not Statements on Standards for Accounting and Review Services. Answer (c) is incorrect as no such statement about opinion-shopping is included. Answer (d) is incorrect because the information may be communicated to a prior or continuing auditor.

138. Trust Service engagements are performed under the provisions of a. Statements on Assurance Standards. b. Statements on Standards for Attestation Engagements. c. Statements on Standards for Trust Engagements d. Statements on Auditing Standards.

Correct Answer: B) Statements on Standards for Attestation Engagements. Notes (b) The requirement is to identify the standards under which Trust Services engagements are performed. Answer (b) is correct because the Statements on Standards for Attestation engagements address such engagements. More information on Trust Services engagements (WebTrust and SysTrust) is available on the AICPA's website—www.aicpa.org. Answers (a) and (c) are incorrect because such standards do not exist. Answer (d) is incorrect because Statements on Auditing Standards do not address Trust Services engagements.

141. An engagement in which a CPA considers security, availability, processing integrity, online privacy, and/or confidentiality over any type of defined electronic system is most likely to considered which of the following types of engagements? a. Internal control over financial reporting. b. SysTrust. c. Website Associate. d. WebTrust.

Correct Answer: B) SysTrust. Notes (b) The requirement is to identify the type of engagement that considers security, availability, processing integrity, online privacy and/or confidentiality over any type of defined electronic system. Answer (b) is correct because SysTrust engagements consider any type of defined electronic system. Answer (a) is incorrect because an engagement to consider internal control over financial reporting does not directly address these attributes. Answer (c) is incorrect because there is no such engagement as a website Associate. Answer (d) is incorrect because WebTrust deals more directly with company websites.

37. An auditor may not issue a qualified opinion when a. An accounting principle at variance with GAAP is used. b. The auditor lacks independence with respect to the audited entity. c. A scope limitation prevents the auditor from completing an important audit procedure. d. The auditor's report refers to the work of a specialist.

Correct Answer: B) The auditor lacks independence with respect to the audited entity. Notes (b) The requirement is to identify the situation in which an auditor may not issue a qualified opinion. Answer (b) is correct because the auditor who lacks independence must disclaim an opinion, not qualify an opinion. Answer (a) is incorrect because a departure from GAAP will result in either a qualified opinion or an adverse opinion. Answer (c) is incorrect because scope limitations result in either a qualified opinion or a disclaimer of opinion. Answer (d) is incorrect because a specialist may be referred to when an auditor is issuing a qualified opinion, an adverse opinion, or a disclaimer of opinion.

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

Correct Answer: B) The financial statements fail to disclose information that is required by generally accepted accounting principles. Notes (b) The requirement is to identify the circumstance in which an auditor will choose between expressing an "except for" qualified opinion and an adverse opinion. Answer (b) is correct because omissions of required information, a departure from generally accepted accounting principles, leads to either a qualified or an adverse opinion. Answer (a) is incorrect because a scope limitation such as the failure to observe a client's physical inventory leads to either a qualified opinion or a disclaimer of opinion. Answer (c) is incorrect because an auditor may issue an unmodified opinion on one statement. Answer (d) is incorrect because substantial doubt about an entity's ability to continue as a going concern leads to either an unmodified report with explanatory language or a disclaimer of opinion.

2. When an accountant performs more than one level of service (for example, a compilation and a review, or a compilation and an audit) concerning the financial statements of a nonissuer (nonpublic) entity, the accountant generally should issue the report that is appropriate for a. The lowest level of service rendered. b. The highest level of service rendered. c. A compilation engagement. d. A review engagement.

Correct Answer: B) The highest level of service rendered. Notes (b) The requirement is to determine an accountant's reporting responsibility when more than one level of service concerning the financial statements of a nonissuer (nonpublic) entity has been performed. Answer (b) is correct because the professional standards that the accountant report on the highest level of service rendered. Answer (a) is incorrect because the highest, and not the lowest, level is reported on. Answer (c) is incorrect because regardless of the other type of service performed, the compilation level is always the lowest level and therefore should not be the basis of the report. Answer (d) is incorrect because in circumstances in which an audit has been performed, an audit report, not a review report, is appropriate.

165. For purposes of an audit of internal control performed under Public Company Accounting Oversight Board standards, the "as of date" is ordinarily a. The first day of the year. b. The last day of the fiscal period. c. The last day of the auditor's fieldwork. d. The average date for the entire fiscal period.

Correct Answer: B) The last day of the fiscal period. Notes (b) The requirement is to identify the "as of date" for purposes of an audit of internal control performed under PCAOB standards. Answer (b) is correct because the "as of date" is the last day of the fiscal period; it is this date on which the auditor concludes as to the effectiveness of internal control. Answers (a) and (c) are incorrect because neither the first day of the year nor the last day of the auditor's fieldwork is the appropriate date on which to evaluate internal control. Answer (d) is incorrect because the "as of date" is a particular date, not an average.

6. For a nonpublic company audit report, a statement that the auditor has audited the financial statements followed by the titles of the financial statements is included in the a. Management's responsibility section of the audit report. b. The opening paragraph of the auditor's standard report. c. The auditor's responsibility section of the audit report. d. The opinion paragraph of the auditor's standard report.

Correct Answer: B) The opening paragraph of the auditor's standard report. Notes (b) The requirement is to identify the correct statement concerning where a statement that the auditor has audited the financial statements which are then listed is included in the audit report. Answer (b) is correct because the opening (introductory) paragraph of the auditor's standard report states that the auditor has audited the financial statements and then lists them. Answer (a) is incorrect because of the explicit statement in the introductory paragraph. Answers (c) and (d) are incorrect because the introductory paragraph, not the auditor's responsibility section or the opinion paragraph, includes the statement and lists the financial statements.

135. Which of the following is not an objective of a CPA's examination of a client's management discussion and analysis (MD&A) prepared pursuant to Securities and Exchange Commission rules and regulations? a. The historical amounts have been accurately derived, in all material respects, from the entity's financial statements. b. The presentation is in conformity with rules and regulations adopted by the Securities and Exchange Commission. c. The underlying information, determinations, estimates and assumptions of the entity provide a reasonable basis for the disclosures contained herein. d. The presentation includes the required elements of MD&A.

Correct Answer: B) The presentation is in conformity with rules and regulations adopted by the Securities and Exchange Commission. Notes (b) The requirement is to determine the reply that is not an objective of a CPA's examination of a client's MD&A. Answer (b) is correct because an examination of a client's MD&A does not directly address overall conformity with such rules and regulations. Answers (a), (c), and (d) are the three objectives of an MD&A examination agreement.

113. Which of the following statements is not included in an accountant's report on the application of accounting principles? a. The engagement was performed following standards established by the American Institute of Certified Public Accountants. b. The report is based on a hypothetical transaction not involving facts or circumstances of this particular entity. c. The report is intended solely for the information and use of specified parties. d. Responsibility for the proper accounting treatment rests with the preparers of the financial statements.

Correct Answer: B) The report is based on a hypothetical transaction not involving facts or circumstances of this particular entity. Notes (b) Answer (b) is correct because AU-C 915 indicates that an accountant should not undertake such an engagement when the report would be based on such a hypothetical transaction. Answers (a), (c), and (d) are all incorrect because they include information included in an accountant's report on the application of accounting principles.

137. Which of the following statements is correct relating to an auditor's review engagements on an entity's management discussion and analysis (MD&A)? a. A review consists principally of applying analytical procedures and search and verification procedures. b. The review report of a public entity should be restricted to the use of specified parties. c. No consideration of internal control is necessary. d. The report issued will ordinarily include a summary of findings, but no negative assurance.

Correct Answer: B) The review report of a public entity should be restricted to the use of specified parties. Notes (b) Answer (b) is correct because the MD&A review of an issuer (public) entity should be restricted to the use of specified parties. Answer (a) is incorrect because a review consists principally of applying analytical procedures, rather than also including search and verification procedures. Answer (c) is incorrect because a consideration of relevant portion of internal control is necessary to identify types of potential misstatements and to select the inquiries and analytical procedures. Answer (d) is incorrect because a review report ordinarily provides negative assurance, not a summary of findings.

185. When an examination has been performed on the effectiveness of entity's internal control over financial reporting and a material weakness has been noted, the practitioner's report should express an opinion on a. The assertion. b. The subject matter to which the assertion relates. c. Neither of the above. d. Both of the above.

Correct Answer: B) The subject matter to which the assertion relates. Notes (b) AT 501 states that when a deviation from the control criteria being reported upon exists (here a material weakness in internal control) the CPA should report directly upon the subject matter and not upon the assertion.

15. In which of the following circumstances would an auditor most likely add an emphasis-of-matter paragraph to the audit report while not affecting the auditor's unmodified opinion? a. The auditor is asked to report on the balance sheet, but not on the other basic financial statements. b. There is substantial doubt about the entity's ability to continue as a going concern. c. Management's estimates of the effects of future events are unreasonable. d. Certain transactions cannot be tested because of management's records retention policy.

Correct Answer: B) There is substantial doubt about the entity's ability to continue as a going concern. Notes (b) The requirement is to identify the situation in which an emphasis-of-matter paragraph may be added to an unmodified report. Answer (b) is correct because substantial doubt about the entity's ability to continue as a going concern leads to either an unmodified report with an emphasis-of-matter paragraph or a disclaimer of opinion. Answer (a) is incorrect because an auditor may issue an opinion on a balance sheet without reporting on the other basic financial statements. Answer (c) is incorrect because unreasonable estimates lead to either a qualified or an adverse opinion. Answer (d) is incorrect because inadequate management record retention policies are a scope limitation that may result in a qualified opinion or a disclaimer.

189. When reporting on an examination of a company's compliance with requirements of specified laws, the practitioner has identified an instance of material noncompliance. Management has agreed to include this instance in its written assertion. The examination report should include a. No modification from the standard form. b. An opinion paragraph that is unmodified, and an emphasis-of-matter paragraph. c. A qualified or adverse opinion. d. A disclaimer of opinion.

Correct Answer: C) A qualified or adverse opinion. Notes (c) The requirement is to identify the correct statement concerning an examination report when management has properly disclosed an instance of material noncompliance. AT 601 states that the opinion should be qualified or adverse. Note that AT 601 requires the CPA's report to relate directly to the subject matter when the opinion is modified.

199. An auditor most likely would be responsible for communicating significant deficiencies in the design of internal control a. To the Securities and Exchange Commission when the client is a publicly held entity. b. To specific legislative and regulatory bodies when reporting under Government Auditing Standards. c. To a court-appointed creditors' committee when the client is operating under Chapter 11 of the Federal Bankruptcy Code. d. To shareholders with significant influence (more than 20% equity ownership) when significant deficiencies are deemed to be material weaknesses.

Correct Answer: B) To specific legislative and regulatory bodies when reporting under Government Auditing Standards. Notes (b) The requirement is to identify to whom an auditor most likely would be responsible for communicating significant deficiencies in the design of internal control. Answer (b) is correct because in audits under Government Auditing Standards, significant deficiencies in the design of internal control are communicated to legislative and regulatory bodies (AU-C 806). Answer (a) is incorrect because the Securities and Exchange Commission does not ordinarily receive information on such deficiencies. Answer (c) is incorrect because while a court-appointed creditors' committee might in some circumstances receive information on such deficiencies, this practice is not as frequent as is done under Government Auditing Standards. Answer (d) is incorrect because shareholders do not normally receive reports on significant deficiencies or material weaknesses (see AU-C 265).

17. Which of the following conditions or events most likely would cause an auditor to have substantial doubt about an entity's ability to continue as a going concern? a. Significant related-party transactions are pervasive. b. Usual trade credit from suppliers is denied. c. Arrearages in preferred stock dividends are paid. d. Restrictions on the disposal of principal assets are present.

Correct Answer: B) Usual trade credit from suppliers is denied. Notes (b) The requirement is to identify the condition or event most likely to cause an auditor to have substantial doubt about an entity's ability to continue as a going concern. Answer (b) is correct because denial of usual trade from suppliers is ordinarily an indicator that the company is in weak financial condition. Answer (a) is incorrect because while such related-party transactions may be considered risky, there is less likely to be a question concerning going concern status than suggested by answer (a). Answer (c) is incorrect because the payment of such stock dividends does not indicate financial weakness. Answer (d) is incorrect because restrictions on the disposal of principal assets is a condition often present in various loan agreements.

127. Accepting an engagement to examine an entity's financial projection most likely would be appropriate if the projection were to be distributed to a. All employees who work for the entity. b. Potential stockholders who request a prospectus or a registration statement. c. A bank with which the entity is negotiating for a loan. d. All stockholders of record as of the report date.

Correct Answer: C) A bank with which the entity is negotiating for a loan. Notes (c) The requirement is to identify the appropriate distribution of an entity's financial projection. A financial projection is sometimes prepared to present one or more hypothetical courses of action for evaluation in response to a question such as "What would happen if...?" It is based on a responsible party's assumptions reflecting conditions it expects would exist and the course of action it expects would be taken, given one or more hypothetical assumptions. Projections are "limited use" financial statements meant for the responsible party (generally management) and third parties with whom the responsible party is negotiating directly. Answer (c) is correct because a bank might be expected to receive such a projection. Answers (a), (b), and (d) are all incorrect because projections are meant for "limited use" and not to be broadly distributed to groups such as all employees or potential or current stockholders. AT 301 provides overall guidance on the area of financial forecasts and projections.

24. For which of the following events would an auditor issue a report that omits any reference to consistency? a. A change in the method of accounting for inventories. b. A change from an accounting principle that is not generally accepted to one that is generally accepted. c. A change in the useful life used to calculate the provision for depreciation expense. d. Management's lack of reasonable justification for a change in accounting principle.

Correct Answer: C) A change in the useful life used to calculate the provision for depreciation expense. Notes (c) The requirement is to identify the circumstances in which an auditor would issue a report that omits any reference to consistency. Answer (c) is correct because a change in the useful life of assets is a change in estimate, and a change in estimate does not result in a consistency modification. Answers (a) and (b) are incorrect because they both represent a change in accounting principle, and a change in accounting principle requires a consistency modification. Answer (d) is incorrect because management's lack of reasonable justification for a change in accounting principle is a departure from generally accepted accounting principles, and the description of the departure will discuss the inconsistency.

200. Wolf is auditing an entity's compliance with requirements governing a major federal financial assistance program in accordance with Government Auditing Standards. Wolf detected noncompliance with requirements that have a material effect on the program. Wolf's report on compliance should express a. No assurance on the compliance tests. b. Reasonable assurance on the compliance tests. c. A qualified or adverse opinion. d. An adverse or disclaimer of opinion.

Correct Answer: C) A qualified or adverse opinion. Notes (c) The requirement is to determine the opinion which an auditor should express in a report on compliance when s/he has detected material instances of noncompliance within the program. AU-C 806 defines these instances of material noncompliance as failures to follow requirements, or violations of regulations or grants which cause the auditor to conclude that the total of the misstatements resulting from these failures or violations is material to the financial statements. Therefore, answer (c) is correct because the auditor should issue a qualified or an adverse opinion. Answer (a) is incorrect because the auditor is required under Governmental Auditing Standards to provide reasonable assurance on the entity's compliance with the applicable laws and regulations. Answer (b) is incorrect because the auditor must disclose the instances of noncompliance. Answer (d) is incorrect because the auditor should not disclaim an opinion as a result of noncompliance.

80. Which of the following is least likely to be a restricted use report? a. A report on internal control significant deficiencies noted in an audit. b. A required communication with the audit committee. c. A report on financial statements prepared following a financial reporting framework other than generally accepted accounting principles. d. A report on compliance with aspects of contractual agreements.

Correct Answer: C) A report on financial statements prepared following a financial reporting framework other than generally accepted accounting principles. Notes (c) The requirement is to identify the report that is least likely to be a restricted-use report. Answer (c) is correct because reports on most financial reporting frameworks other than GAAP are not restricted. Answers (a) and (b) are incorrect because reports on significant deficiencies and reports to audit committees are restricted under the professional standards. Answer (d) is incorrect because a report on compliance is restricted.

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

Correct Answer: C) Accept the engagement because such engagements merely involve limited reporting objectives. Notes (c) The requirement is to identify a CPA's responsibility when asked to report on only one financial statement. Answer (c) is correct because the auditor may accept the engagement because the situation involves limited reporting objectives, not a limitation on the scope of audit procedures. Answers (a), (b), and (d) are incorrect because the auditor is able to accept such an engagement and because the auditor is able to apply the procedures considered necessary.

77. If an auditor is asked to provide an opinion relating to information accompanying the financial statements in a document, the opinion will ordinarily be upon whether the information is fairly stated in a. Accordance with US generally accepted auditing standards. b. Conformity with US generally accepted accounting principles. c. All material respects in relation to the basic financial statements taken as a whole. d. Accordance with attestation standards expressing a conclusion about management's assertions.

Correct Answer: C) All material respects in relation to the basic financial statements taken as a whole. Notes (c) The requirement is to identify the correct statement that may be included in an auditor's report when an auditor provides an opinion on information accompanying the basic financial statements. Answer (c) is correct because the report indicates whether the accompanying information is fairly stated in all material respects in relation to the basic financial statements taken as a whole. Answer (a) is incorrect because the information is not presented in accordance with generally accepted auditing standards. Answer (b) is incorrect because the information is in addition to that required by generally accepted accounting principles. Answer (d) is incorrect because it is not in accordance with attestation standards.

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

Correct Answer: C) An audit includes assessing significant estimates made by management. Notes (c) The requirement is to identify the statement that is included in the auditor's standard report. Answer (c) is correct because the auditor's standard report states that an audit includes assessing significant estimates made by management; the other replies provide information not directly mentioned in a standard report.

114. Which of the following services would be most likely to be structured as an attest engagement? a. Advocating a client's position in tax matter. b. A consulting engagement to develop a new database system for the revenue cycle. c. An engagement to issue a report addressing an entity's compliance with requirements of specified laws. d. The compilation of a client's forecast information.

Correct Answer: C) An engagement to issue a report addressing an entity's compliance with requirements of specified laws. Notes (c) The requirement is to select the service that is most likely to be structured as an attest engagement. Answer (c) is correct because CPAs may provide assurance as to compliance with requirements of specified laws through a variety of services, including agreed-upon procedures engagements and various compliance audits. Answers (a) and (b) are incorrect because advocating a client's tax position and consulting on a new database system are examples of professional services not typically structured as attest services. Answer (d) is incorrect because compilations are not a form of attest engagement.

174. Which of the following is most likely to indicate a significant deficiency relating to a client's antifraud programs? a. A broad scope of internal audit activities. b. A "whistle-blower" program that encourages anonymous submissions. c. Audit committee passivity when conducting oversight functions. d. Lack of performance of criminal background investigations for likely customers.

Correct Answer: C) Audit committee passivity when conducting oversight functions. Notes (c) The requirement is to identify the most likely significant deficiency relating to a client's antifraud programs. Answer (c) is correct because an active audit committee, not a passive audit committee is needed. Answer (a) is incorrect because a broad scope of internal audit activities is ordinarily a strength, not a deficiency. Answer (b) is incorrect because a whistle-blower program that encourages anonymous submissions is required. Answer (d) is incorrect because it is not ordinarily necessary to perform criminal background investigations for likely customers.

100. An auditor may report on summary financial statements that are derived from complete financial statements if the a. Summary financial statements are distributed to stockholders along with the complete financial statements. b. Auditor described the additional procedures performed on the summary financial statements. c. Auditor indicates whether the information in the summary financial statements is fairly stated in all material respects in relation to the complete financial statements from which it has been derived. d. Summary financial statements are presented in comparative form with the prior year's summary financial statements.

Correct Answer: C) Auditor indicates whether the information in the summary financial statements is fairly stated in all material respects in relation to the complete financial statements from which it has been derived. Notes (c) The requirement is to determine the circumstance under which an auditor may report on summary financial statements that are derived from complete audited financial statements. Answer (c) is correct because a report may be issued when the information in the summary financial statements is fairly stated in all material respects in relation to the financial statements. Answer (a) is incorrect because the summary financial statements need not be distributed with the complete financial statements. Answer (b) is incorrect because the report need not indicate the nature of any additional procedures. Answer (d) is incorrect because prior year summary financial information is not necessary. See AU-C 810 for information on summary financial statements.

5. For a nonpublic company, which section (paragraph) of the audit report includes a statement that the auditor believes that the audit evidence obtained is sufficient? a. Introductory. b. Opinion. c. Auditor's responsibility. d. Management's responsibility.

Correct Answer: C) Auditor's responsibility. Notes (c) The requirement is to identify which section of the audit report the auditor speaks of the adequacy of audit evidence. Answer (a) is correct because in the auditor's responsibility section the auditors states a belief that the audit evidence obtained is sufficient and appropriate to provide a basis for the audit opinion.

154. An engagement to examine internal control will generally a. Require procedures that duplicate those already applied in assessing control risk during a financial statement audit. b. Increase the reliability of the financial statements that have already been audited. c. Be more extensive in scope than the assessment of control risk made during a financial statement audit. d. Be more limited in scope than the assessment of control risk made during a financial statement audit.

Correct Answer: C) Be more extensive in scope than the assessment of control risk made during a financial statement audit. Notes (c) The requirement is to determine the correct statement regarding an engagement to examine internal control. Answer (c) is correct because the procedures relating to internal control will be more extensive when reporting on internal control as compared to procedures performed for a financial statement audit. This difference occurs because during financial statement audits the auditor may decide not to perform tests of controls and may simply assess control risk at the maximum level. Conversely, in an engagement to report on internal control an auditor must perform additional tests of controls. Answer (a) is incorrect because such duplication of procedures may not be necessary. Answer (b) is incorrect because a report on internal control will not in general increase the reliability of the financial statements. Answer (d) is incorrect because, as indicated, the scope of procedures relating to internal control is more extensive, not more limited, than the assessment of control risk made during a financial statement audit.

207. A CPA has performed an examination of the general-purpose financial statements of Big City. The examination scope included the additional requirements of the Single Audit Act. When reporting on Big City's internal accounting and administrative controls used in administering a federal financial assistance program, the CPA should a. Communicate those weaknesses that are material in relation to the general-purpose financial statements. b. Express an opinion on the systems used to administer major federal financial assistance programs and express negative assurance on the systems used to administer nonmajor federal financial assistance programs. c. Communicate those weaknesses that are material in relation to the federal financial assistance program. d. Express negative assurance on the systems used to administer major federal financial assistance programs and express no opinion on the systems used to administer nonmajor federal financial assistance programs.

Correct Answer: C) Communicate those weaknesses that are material in relation to the federal financial assistance program. Notes (c) The requirement is to identify the correct statement which would communicate weaknesses in internal control used in administering a federal financial assistance program when a CPA has examined the general purpose financial statements of a municipality. The AICPA Accounting and Audit Guide, Audits of State and Local Governmental Units, requires the communication of weaknesses that are material in relation to the federal financial assistance program.

136. Which of the following is an assertion embodied in management's discussion and analysis (MD&A)? a. Valuation. b. Reliability. c. Consistency with the financial statements. d. Rights and obligations.

Correct Answer: C) Consistency with the financial statements. Notes (c) The requirement is to identify an assertion embodied in MD&A. Answer (c) is correct because the attestation standards on MD&A indicate that consistency with the financial statements is an assertion—in addition, occurrence, completeness, and presentation and disclosure are embodied assertions. Answers (a), (b), and (d) are all incorrect because valuation, reliability, and rights and obligations are not considered to be assertions embodied in the MD&A.

99. An accountant's review report on interim financial information of a public entity is most likely to include a a. Statement that the interim financial information was examined in accordance with standards of the Public Company Accounting Oversight Board. b. Statement that the interim financial information is the responsibility of the entity's shareholders. c. Description of the procedures for a review. d. Statement that a review of interim financial information is less in scope than a compilation conducted in accordance with AICPA standards.

Correct Answer: C) Description of the procedures for a review. Notes (c) The requirement is to identify the most likely information included in a review report. Answer (c) is correct because the professional standards require that the report include a description of procedures performed. Answer (a) is incorrect because the information was reviewed, not examined, in accordance with standards of the PCAOB. Answer (b) is incorrect because the interim financial information is the responsibility of the entity's management, not the shareholders. Answer (d) is incorrect because a review is less in scope than an audit, not than a compilation.

115. An unmodified attestation report ordinarily may refer to a. Only the assertion. b. Only the subject matter to which the assertion relates. c. Either the assertion or the subject matter to which the assertion relates. d. Neither the assertion nor the subject matter to which the assertion relates.

Correct Answer: C) Either the assertion or the subject matter to which the assertion relates. Notes (c) Answer (c) is correct because AT 101 indicates that an unmodified may ordinarily refer to that assertion or to the subject matter to which the assertion relates. Answer (a) is incorrect because it suggests reporting only on the assertion. Answer (b) is incorrect because it suggests reporting only on the subject matter. Answer (d) is incorrect because it suggests that reporting on neither the assertion nor the subject matter is appropriate. Note, however, that AT 101 also states that when a deviation from the criteria being reported upon exits (e.g., a material weakness in internal control" the CPA should report directly upon the subject matter and not upon the assertion.

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

Correct Answer: C) Except for the omission of the information discussed in the preceding paragraph. Notes (c) The requirement is to identify the phrase that an auditor would include in an audit report with a qualified opinion because of inadequate disclosure. Answer (c) is correct because the phrase "except for the omission of the information discussed in the opinion paragraph" is the proper phrase. Answers (a), (b), and (d) are all incorrect because they are phrases not allowed in reports with qualified opinions.

206. When performing an audit of a city that is subject to the requirements of the Uniform Single Audit Act of 1984, an auditor should adhere to a. Governmental Accounting Standards Board General Standards. b. Governmental Finance Officers Association Governmental Accounting, Auditing, and Financial Reporting Principles. c. General Accounting Office Government Auditing Standards. d. Securities and Exchange Commission Regulation S-X.

Correct Answer: C) General Accounting Office Government Auditing Standards. Notes (c) The requirement is to identify the source of authoritative guidance for performing audits of a city that is subject to the requirements of the Uniform Single Audit Act of 1984. Answer (c) is correct because while the AICPA's generally accepted auditing standards must be followed to the extent they are pertinent, the General Accounting Office Government Auditing Standards must also be adhered to. The other replies all relate to standards not directly related to the Uniform Single Audit Act.

191. Hill, CPA, is auditing the financial statements of Helping Hand, a not-for-profit organization that receives financial assistance from governmental agencies. To detect misstatements in Helping Hand's financial statements resulting from violations of laws and regulations, Hill should focus on violations that a. Could result in criminal prosecution against the organization. b. Involve significant deficiencies to be communicated to the organization's trustees and the funding agencies. c. Have a direct and material effect on the amounts in the organization's financial statements. d. Demonstrate the existence of material weaknesses.

Correct Answer: C) Have a direct and material effect on the amounts in the organization's financial statements. Notes (c) The requirement is to determine the focus of an auditor's attention in detecting misstatements resulting from violations of laws and regulations when auditing a not-for-profit organization that receives financial assistance from governmental agencies. Answer (c) is correct because the focus of such procedures should be on violations that have a direct and material effect on the amounts in the organization's financial statements (AU-C 806). Answers (a), (b), and (d) all represent a focus that is not as accurate as that provided in answer (c).

51. An auditor who qualifies an opinion because of an insufficiency of audit evidence should describe the limitations in a basis for modification paragraph. The auditor should also refer to the limitation in the I. Auditor's responsibility section II. Opinion paragraph III. Notes to the financial statements a. I and III b. II only c. I and II d. I, II, and III

Correct Answer: C) I and II Notes (c) The requirement is to determine whether the auditor responsibility section, opinion paragraph, and/or notes to the financial statements should refer to an audit scope limitation. Answer (c) is correct because the suggested report presented for a scope limitation includes modification of both the scope and opinion paragraphs. In addition, it is not appropriate for the scope of the audit to be explained in a note to the financial statements.

128. A CPA in public practice is required to comply with the provisions of the Statements on Standards for Attestation Engagements (SSAE) when I. Testifying as an expert witness in accounting and auditing matters given stipulated facts II. Compiling a client's financial projection that presents a hypothetical course of action a. Both I and II b. I only c. II only d. Neither I nor II

Correct Answer: C) II only Notes (c) The requirement is to determine whether either testifying as an expert witness, compiling a financial projection, or both are engagements governed by the provisions of the Statement on Standards for Attestation Statements. Answer (c) is correct because the attestation standards explicitly exclude expert witness work, but include the compilation of a financial projection; note that in most areas compilations are not included in attestation standard coverage, but in the area of prospective financial statement (forecasts as well as projections) coverage is included. Answer (a) is incorrect because it states that expert witness work is included. Answer (b) is incorrect both because it states that expert witness work is included and that compiling a projection is not included. Answer (d) is incorrect because it states that compilations of projections are not included.

11. An auditor concludes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. If the entity's financial statements adequately disclose its financial difficulties, the auditor's report is required to include an emphasis-of-matter paragraph that specifically uses the phrase(s) I. "Reasonable period of time, not to exceed 1 year" II. "Going concern" a. Both I and II b. I only c. II only d. Neither I nor II

Correct Answer: C) II only Notes (c) The requirement is to determine whether the term "reasonable period of time, not to exceed one year" and/or "going concern" is included in an emphasis-of-matter paragraph relating to going concern status. Answer (c) is correct because while the term "going concern" must be included, the first term is not included in such a report.

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

Correct Answer: C) Increase ownership equity. Notes (c) The requirement is to identify the management plan an auditor would most likely positively consider when a question concerning an entity's ability to continue as a going concern exists. Answer (c) is correct because increasing the ownership equity will bring in funds to possibly overcome the negative trends and financial difficulties. Answers (a), (b), and (d) are all incorrect because increasing dividend distributions, reducing lines of credit, and purchasing assets will all use funds, they will not provide funds. See AU-C 570 for guidance on an auditor's consideration of an entity's ability to continue as a going concern.

121. Which of the following is least likely to be included in an agreed-upon procedures attestation engagement report? a. The specified party takes responsibility for the sufficiency of procedures. b. Use of the report is restricted. c. Limited assurance on the information presented. d. A summary of procedures performed.

Correct Answer: C) Limited assurance on the information presented. Notes (c) The requirement is to identify the information that is least likely to be included in an agreed-upon procedures attestation report. Answer (c) is correct because an agreed-upon procedures report provides a summary of procedures performed and findings, not limited assurance. Answer (a) is incorrect because the specified party does not take responsibility for the sufficiency of procedures. Answer (b) is incorrect because the report's use is restricted. Answer (d) is incorrect because a summary of procedures performed is included.

34. An auditor issued an audit report that was dual dated for a subsequent event occurring after the completion of fieldwork but before issuance of the auditor's report. The auditor's responsibility for events occurring subsequent to the completion of fieldwork was a. Extended to subsequent events occurring through the date of issuance of the report. b. Extended to include all events occurring since the completion of fieldwork. c. Limited to the specific event referenced. d. Limited to include only events occurring up to the date of the last subsequent event referenced.

Correct Answer: C) Limited to the specific event referenced. Notes (c) The requirement is to determine an auditor's responsibility for subsequent events when an audit report has been dual dated for a subsequent event. Answer (c) is correct because, when dual dating is used, auditor responsibility for events subsequent to the completion of fieldwork is limited to the specific event referred to in the notes to the financial statement. Answers (a), (b), and (d) are all incorrect because they establish more responsibility than required by the professional standards. Note, however, that if the auditor chooses to date the report as of the date of the subsequent event, his/her responsibility for other subsequent events extends to the date of the audit report.

23. The adverse effects of events causing an auditor to believe there is substantial doubt about an entity's ability to continue as a going concern would most likely be mitigated by evidence relating to the a. Ability to expand operations into new product lines in the future. b. Feasibility of plans to purchase leased equipment at less than market value. c. Marketability of assets that management plans to sell. d. Committed arrangements to convert preferred stock to long-term debt.

Correct Answer: C) Marketability of assets that management plans to sell. Notes (c) The requirement is to identify the circumstance most likely to mitigate an auditor's substantial doubt about an entity's ability to continue as a going concern. Answer (c) is correct because the marketable assets that management intends to sell may potentially provide the necessary financial resources to mitigate the substantial doubt about the entity's ability to continue as a going concern. Answer (a) is incorrect because the ability to expand operations into new product lines is a suspect circumstance, given the substantial doubt about the entity's ability to continue as a going concern. Answer (b) is incorrect because it also requires cash resources which may not be available. Answer (d) is incorrect because converting preferred stock to long-term debt will not generally alleviate a question concerning an entity's ability to continue as a going concern.

180. In an integrated audit, which must the auditor communicate in writing to management? a. Only material weaknesses. b. Material weaknesses and significant deficiencies. c. Material weaknesses, significant deficiencies and other control deficiencies. d. Material weaknesses, significant deficiencies, other control deficiencies, and all suspected and possible employee law violations.

Correct Answer: C) Material weaknesses, significant deficiencies and other control deficiencies. Notes (c) The requirement is to identify the information that must be communicated in writing to management. Answer (c) is correct because in an integrated audit all material weaknesses, significant deficiencies, and other control deficiencies must be reported to management. Answers (a) and (b) are incorrect because they are incomplete. Answer (d) is incorrect because "all suspected and possible employee law violations" need not be communicated.

98. Which of the following is least likely to be a procedure included in an accountant's review of interim financial information of a public entity? a. Compare disaggregated revenue data by month to that of the previous interim period. b. Read available minutes of meetings of stockholders. c. Observe counting of physical inventory. d. Inquire of management concerning significant journal entries and other adjustments.

Correct Answer: C) Observe counting of physical inventory. Notes (c) The requirement is to identify the least likely procedure to be included in an accountant's review of interim financial information of an issuer (public) entity. Answer (c) is correct because a review consists principally of performing analytical procedures and making inquiries, not procedures such as observation, inspection, and confirmation. Answers (a), (b), and (d) are all incorrect because they include review procedures included in the professional standards

155. Which of the following is correct concerning the level of assistance auditors may provide in assisting management with its assessment of internal control? a. No assistance of any type may be provided. b. No limitations on assistance exist. c. Only very limited assistance may be provided. d. As less risk is assumed by the auditors, a higher level of assistance is appropriate.

Correct Answer: C) Only very limited assistance may be provided. Notes (c) The requirement is to identify the correct statement concerning the level of assistance that auditors may provide in assisting management with its assessment of internal control. Answer (c) is correct since only limited assistance may be provided so as not to create a situation in which the auditors are auditing their own work. Answer (a) is incorrect since some assistance may be provided. Answer (b) is incorrect because there are limitations on the level of assistance. Answer (d) is incorrect because the tie between risk and assistance seems inappropriate and in the wrong direction; also, this type of tradeoff between risk and assistance is not included in PCAOB Standard 5.

179. Which is correct concerning the external auditors' use of the work of others in an audit of internal control performed for a public company? a. It is not allowed. b. The work of internal auditors may be used, but only when those internal auditors report directly to the audit committee. c. Ordinarily the work of internal auditors and others is used primarily in low-risk areas. d. There is no limitation and is likely to reduce auditor liability since the auditors will then share legal responsibility with those who have performed the service.

Correct Answer: C) Ordinarily the work of internal auditors and others is used primarily in low-risk areas. Notes (c) The requirement is to identify the correct statement concerning the external auditors' use of the work of others when performing an audit of internal control of a public company. Answer (c) is correct because, after assuring themselves as to the competence and objectivity of the internal auditors and others, the external auditors may use their work—particularly in low-risk areas and when that work is supervised and/or reviewed. Answer (a) is incorrect because using the work of internal auditors and others is allowed. Answer (b) is incorrect because there is no such requirement of reporting to the audit committee, although this is one indication of internal auditor objective. Answer (d) is incorrect because there are limitations, and because it is uncertain whether liability will be shared.

87. An auditor's report on financial statements prepared in conformity with the cash basis of accounting should include a separate emphasis-of-matter paragraph that a. Justifies the reasons for departing from generally accepted accounting principles. b. States whether the financial statements are fairly presented in conformity with GAAP. c. Refers to the note to the financial statements that describes the basis of accounting. d. Explains how the results of operations differ from financial statements prepared in conformity with generally accepted accounting principles.

Correct Answer: C) Refers to the note to the financial statements that describes the basis of accounting. Notes (c) The requirement is to identify the disclosure included in a separate emphasis-of-matter paragraph of an auditor's report on financial statements prepared in conformity with the cash basis of accounting. Answer (c) is correct because the emphasis-of-matter paragraph refers to the note to the financial statements that describes the basis of accounting. AU-C 800 presents complete details on such reports. Answer (a) is incorrect because the report need not justify the reasons for following a basis other than generally accepted accounting principles. Answer (b) is incorrect because the emphasis-of-matter paragraph contains no statement on fair presentation, and because the opinion paragraph states whether the presentation is in conformity with the basis described in the appropriate financial statement note. Answer (d) is incorrect because no explanation of how the results of operations differ from financial statements prepared in conformity with generally accepted accounting principles is necessary.

170. For purposes of an audit of internal control performed under Public Company Accounting Oversight Board requirements, an account is significant if there is more than a a. Reasonably possible likelihood that it could contain immaterial or material misstatements. b. Reasonably possible likelihood that it could contain material misstatements. c. Remote likelihood that it could contain material misstatements. d. Remote likelihood that it could contain more than inconsequential misstatements.

Correct Answer: C) Remote likelihood that it could contain material misstatements. Notes (c) The requirement is to identify the circumstance that makes an account significant for purposes of a PCAOB audit of internal control. Answer (c) is correct because Standard 5 requires only more than a remote likelihood of material misstatement. Answer (a) is incorrect because the standard requires only a remote likelihood and because it is limited to material misstatements. Answer (b) is incorrect because the standard requires more than a remote likelihood, not more than a reasonably possible likelihood. Answer (d) is incorrect because material misstatements are involved, not misstatements that are more than inconsequential.

186. Which of the following types of engagements is not permitted under the professional standards for reporting on an entity's compliance? a. Agreed-upon procedures on compliance with the specified requirements of a law. b. Agreed-upon procedures on the effectiveness of internal control over compliance with a law. c. Review on compliance with specified requirements of a law. d. Examination on compliance with specified requirements of a law.

Correct Answer: C) Review on compliance with specified requirements of a law. Notes (c) The requirement is to identify the type of association not permitted under the compliance attestation standards. AT 601 does not allow the CPA to perform a review over compliance.

149. The type of service organization control (SOC) report that is for general use is a. SOC 1. b. SOC 2. c. SOC 3. d. SOC 4.

Correct Answer: C) SOC 3. Notes (c) Answer (c) is correct because an SOC 3 report is a general-use report. Answers (a) and (b) are incorrect because SOC 1 and SOC 2 reports are restricted-use reports. Answer (d) is incorrect because no SOC 4 report exists.

75. In an audit of a nonissuer company, which statement is correct concerning required supplementary information by a designated accounting standards setter? a. The auditor has no responsibility for required supplementary information as long as it is outside the basic financial statements. b. The auditor's only responsibility for required supplementary information is to determine that such information has not been omitted. c. The auditor should apply certain limited procedures to the required supplementary information, and report deficiencies in, or omissions of, such information. d. The auditor should apply tests of details of transactions and balances to the required supplementary information, and report any material misstatements in such information.

Correct Answer: C) The auditor should apply certain limited procedures to the required supplementary information, and report deficiencies in, or omissions of, such information. Notes (c) The requirement is to identify an auditor's responsibility for required supplementary information that is placed outside the basic financial statements. Answer (c) is correct because AU-C 730 requires that the auditor apply limited procedures to the information and report deficiencies in, or the omission of, the information. Answer (a) is incorrect because the auditor does have some responsibility for the supplementary information. Answer (b) is incorrect because the auditor must apply limited procedures to information presented and report deficiencies in the information in addition to determining whether it has been omitted. Answer (d) is incorrect because tests of details of transactions and balances need not be performed.

178. In which manner are significant deficiencies communicated by the auditors to the audit committee under Public Company Accounting Oversight Board Standard 5? a. The communication may either be orally or in written form. b. The communication must be oral, and not in written form. c. The communication must be in written form. d. No such communication is required as only material weaknesses must be communicated.

Correct Answer: C) The communication must be in written form. Notes (c) The requirement is to determine the manner in which significant deficiencies are communicated by the auditor to the audit committee under PCAOB Standard 5. Answer (c) is correct because the Standard requires a written communication. Answer (a) is incorrect because a written communication is required. Answer (b) is incorrect because the communication must be in a written form, not in an oral form. Answer (d) is incorrect because both material weaknesses and significant deficiencies must be communicated.

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

Correct Answer: C) The financial statements are not in conformity with a FASB requirement regarding the capitalization of leases. Notes (c) The requirement is to identify the circumstance that would most likely result in an auditor expressing an adverse opinion. Answer (c) is correct because departures from GAAP, such as inappropriately reporting leases, result in either a qualified or an adverse opinion. Answer (a) is incorrect because client refusal to provide access to minutes is a client imposed scope limitation that will normally result in a disclaimer of opinion. Answer (b) is incorrect because weak internal control will not in general result in an adverse opinion; if controls are so weak that an audit cannot effectively be completed, a disclaimer of opinion or withdrawal may be appropriate. Answer (d) is incorrect because substantial doubt about going concern status results in either an unmodified opinion with an emphasis-of-matter paragraph or a disclaimer of opinion.

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

Correct Answer: C) The possible effects on the financial statements. Notes (c) The requirement is to identify the information included in the opinion paragraph of an auditor's report that is qualified due to a major inadequacy in the computerized accounting records. Answer (c) is correct because the opinion paragraph indicates that the exception is due to the possible effects on the financial statements. Answer (a) is incorrect because the opinion paragraph will not include a reference to client-imposed scope limitations. Answer (b) is incorrect because no indication of a departure from generally accepted auditing standards is provided in the opinion paragraph and this situation is not a departure from GAAS. Answer (d) is incorrect because there is no indication that there is inadequate disclosure of necessary information.

10. Which of the following is not correct concerning information included in an audit report of financial statements issued under the requirements of the Public Company Accounting Oversight Board? a. The report should include the title "Report of Independent Registered Public Accounting Firm." b. The report should refer to the standards of the PCAOB. c. The report should include a paragraph referring to the auditor's report on compliance with laws and regulations. d. The report should contain the city and state or country of the office that issued the report.

Correct Answer: C) The report should include a paragraph referring to the auditor's report on compliance with laws and regulations. Notes (c) The requirement is to identify the incorrect statement concerning information included in an audit report of financial statements issued under the requirements of the PCAOB. Answer (c) is correct since the report should refer to the auditor's report on internal control, not on compliance with laws and regulations. Answer (a) is incorrect because the report should include the title "Report of Independent Registered Public Accounting Firm." Answer (b) is incorrect because the report should refer to the standards of the PCAOB. Answer (d) is incorrect because the report should contain the city and state or country of the office that issued the report.

126. An accountant's compilation report on a financial forecast should include a statement that a. The forecast should be read only in conjunction with the audited historical financial statements. b. The accountant expresses only limited assurance on the forecasted statements and their assumptions. c. There will usually be differences between the forecasted and actual results. d. The hypothetical assumptions used in the forecast are reasonable in the circumstances.

Correct Answer: C) There will usually be differences between the forecasted and actual results. Notes (c) The requirement is to identify the statement which should be included in an accountant's compilation report on financial forecasts. Answer (c) is correct because when the accountant is preparing a standard compilation report on prospective financial statements, AT 301 requires that the accountant include a statement indicating that the prospective results may not be achieved.

166. Consider an issuer (public) company whose purchases are made through the Internet and by telephone. Which of the following is correct? a. These types of purchases represent control objectives for the audit of internal control. b. These purchases are the assertions related to the purchase class of transactions. c. These types of purchases represent two major classes of transactions within the purchases process. d. These two types of transactions represent routine transactions that must always be investigated in extreme detail.

Correct Answer: C) These types of purchases represent two major classes of transactions within the purchases process. Notes (c) The requirement is to identify the correct statement concerning a company that makes purchases both through the Internet and by telephone. Answer (c) is correct because both types of purchases are a part of the purchases process and represent major classes of transactions, as per PCAOB Standard 5. Answer (a) is incorrect because the purchase types themselves are not control objectives for internal control (control objectives address issues such as the completeness of the recording of sales). Answer (b) is incorrect because purchases are not assertions. Answer (d) is incorrect because purchase transactions may or may not be investigated in extreme detail.

123. Which of the following is not correct concerning "specified parties" of an agreed-upon procedures report under either the auditing or attestation standards? a. They must agree on the procedures to be performed. b. They must take responsibility for the adequacy of the procedures performed. c. They must sign an engagement letter. d. After completion of the engagement, another party may be added as a specified user.

Correct Answer: C) They must sign an engagement letter. Notes (c) The requirement is to identify the statement that is not correct concerning "specified parties" of an agreed-upon procedures report under either the auditing or attestation standards. Answer (c) is correct because while a practitioner should establish a clear understanding regarding the terms of the engagement, preferably in an engagement letter, no such engagement letter is required. Answers (a) and (b) are incorrect because the specified parties must agree on the procedures to be performed and take responsibility for their adequacy. Answer (d) is incorrect because an additional party may be added as a specified party after completion of the engagement.

31. An 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. 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. Emphasis-of-matter paragraph. c. Unmodified opinion. d. Consistency modification.

Correct Answer: C) Unmodified opinion. Notes (c) The requirement is to determine the proper reporting option for a change in accounting principles with an immaterial current year effect, but which is expected to have a substantial effect in subsequent years. Answer (c) is correct because the auditor need not recognize the change in the audit report and may issue a standard unmodified opinion.

64. In May 20X9, an auditor reissues the auditor's report on the 20X7 financial statements at a continuing client's request. The 20X7 financial statements are not restated and the auditor does not revise the wording of the report. The auditor should a. Dual date the reissued report. b. Use the release date of the reissued report. c. Use the original report date on the reissued report. d. Use the current period auditor's report date on the reissued report.

Correct Answer: C) Use the original report date on the reissued report. Notes (c) The requirement is to determine the proper date of a reissued audit report on financial statements that have not been restated. Answer (c) is correct because use of the original date on the reissued audit report removes any implication that records, transactions or events after the date of the audit report have been examined or reviewed.

159. A material weakness is a significant deficiency (or combination of significant deficiencies) that results in a reasonable possibility that a misstatement of at least what amount will not be prevented or detected? a. An amount greater than zero. b. An amount greater than zero, but at least inconsequential. c. An amount greater than inconsequential. d. A material amount.

Correct Answer: D) A material amount. Notes (d) The requirement is to identify the amount involved with a material weakness. Answer (d) is correct because a material amount is involved. Answers (a), (b), and (c) are all incorrect because they suggest smaller amounts.

132. When an accountant examines a financial forecast that fails to disclose several significant assumptions used to prepare the forecast, the accountant should describe the assumptions in the accountant's report and issue a(n) a. "Except for" qualified opinion. b. "Subject to" qualified opinion. c. Unmodified opinion with a separate emphasis-of-matter paragraph. d. Adverse opinion.

Correct Answer: D) Adverse opinion. Notes (d) The requirement is to determine the appropriate type of audit report to be issued when an accountant examines a financial forecast that fails to disclose several significant assumptions used to prepare the forecast. AT 301 states that an adverse opinion is appropriate when significant assumptions are not disclosed.

79. Which of the following types of reports is most likely to include an alert as to its use being restricted to certain specified parties? a. Audit report. b. Review report. c. Compilation report. d. Agreed-upon procedures report.

Correct Answer: D) Agreed-upon procedures report. Notes (d) The requirement is to identify the type of report that is most likely to include an alert to readers that its use is restricted to certain specified users. Answer (d) is correct because all agreed-upon procedures reports are so restricted. Although audit, review, or compilations reports may be so restricted, there is no requirement that they be.

78. Which of the following statements is correct concerning an auditor's responsibility for controlling the distribution by the client of a restricted-use report? a. An auditor must make clear to the client that it is illegal to distribute such a report beyond to specified parties. b. When an auditor is aware that a client has distributed a restricted-use report to inappropriate third parties, the auditor should immediately inform the client to cease and desist. c. An auditor controls distribution through insisting that the client not duplicate the restricted-use report for any purposes. d. An auditor is not responsible for controlling the distribution of such reports.

Correct Answer: D) An auditor is not responsible for controlling the distribution of such reports. Notes (d) The requirement is to determine an auditor's responsibility for controlling the distribution by the client of a restricted-use report. Answer (d) is correct because the professional standards state that an auditor is not responsible for controlling the distribution of such reports. Answer (a) is incorrect because while an auditor should consider informing a client that restricted-use reports are not intended for such distribution, there is no such requirement and such distribution may or may not be legal. Answer (b) is incorrect because the auditor need not inform the client to cease and desist. Answer (c) is incorrect because an auditor need not insist that the client not duplicate the restricted-use report.

108. Which of the following matters is covered in a typical comfort letter? a. Negative assurance concerning whether the entity's internal control procedures operated as designed during the period being audited. b. An opinion regarding whether the entity complied with laws and regulations under Government Auditing Standards and the Single Audit Act of 1984. c. Positive assurance concerning whether unaudited condensed financial information complied with generally accepted accounting principles. d. An opinion as to whether the audited financial statements comply in form with the accounting requirements of the SEC.

Correct Answer: D) An opinion as to whether the audited financial statements comply in form with the accounting requirements of the SEC. Notes (d) The requirement is to identify the information included in a typical comfort letter. Answer (d) is correct because in a comfort letter auditors provide an opinion as to whether the audited financial statements comply in form with the accounting requirements of the SEC. Answer (a) is incorrect because negative assurance concerning whether the entity's internal control procedures operated as designed during the period is not provided. Answer (b) is incorrect because a comfort letter does not include an opinion on whether the entity complied with Government Auditing Standards and the Single Audit Act. Answer (c) is incorrect because negative, not positive, assurance is provided on unaudited summary financial information.

197. In reporting under Government Auditing Standards, an auditor most likely would be required to report a falsification of accounting records directly to a federal inspector general when the falsification is a. Discovered after the auditor's report has been made available to the federal inspector general and to the public. b. Reported by the auditor to the audit committee as a significant deficiency in internal control. c. Voluntarily disclosed to the auditor by low-level personnel as a result of the auditor's inquiries. d. Communicated by the auditor to the auditee and the auditee fails to make a required report of the matter.

Correct Answer: D) Communicated by the auditor to the auditee and the auditee fails to make a required report of the matter. Notes (d) The requirement is to identify the circumstance in which an auditor is required to report a falsification of accounting records directly to a federal inspector general. Answer (d) is correct because under Government Auditing Standards a falsification of accounting records must ordinarily be communicated by the auditor to the auditee and, if the auditee fails to make appropriate disclosure, by the auditor to a federal inspector general. Answers (a), (b), and (c) all provide inaccurate descriptions of auditor reporting responsibility. See Government Auditing Standards (the "Yellow Book") for information on reporting under Government Auditing Standards.

38. In an accountant's review of interim financial information, the accountant typically performs each of the following, except a. Reading the available minutes of the latest stockholders' meeting. b. Applying financial ratios to the interim financial information. c. Inquiring of the accounting department's management. d. Confirming major receivable accounts.

Correct Answer: D) Confirming major receivable accounts. Notes (d) The requirement is to identify the procedure not ordinarily included in an accountant's review of interim financial information. Answer (d) is correct because reviews consist largely of inquiries of management and analytical procedures and not corroborating external evidence such as confirmations. Answer (a) is incorrect because the reading of minutes is ordinarily a part of a review. Answer (b) is incorrect because "applying financial ratios" is a form of analytical procedures that may be included in a review. Answer (c) is incorrect because inquiries of accounting department management personnel are appropriate in a review.

120. Which of the following is least likely to result in a restricted use attest report? a. Criteria suitable only for a limited number of parties. b. Subject matter available only to specified parties. c. A written assertion has not been obtained. d. Criteria developed by an industry association.

Correct Answer: D) Criteria developed by an industry association. Notes (d) The requirement is to identify the situation that is least likely to result in a restricted use attest report. Answer (d) is correct because criteria developed by an industry association may or may not result in a restricted use attest report. Answers (a), (b), and (c) always result in a restricted use report.

131. Which of the following is not included in a compilation report on prospective financial statements? a. A statement that the practitioner assumes no responsibility to update the report for events and circumstances occurring after the date of the report. b. A caveat that the prospective results may not be achieved. c. A statement that a compilation is limited in scope and does not enable the practitioner to express an opinion or any other form of assurance on the information. d. Distribution of the report is restricted to specified parties.

Correct Answer: D) Distribution of the report is restricted to specified parties. Notes (d) The requirement is to identify the statement that is not included in a compilation report on prospective financial statements. Answer (d) is correct because distribution of such a report is not necessarily restricted to specified parties. Answers (a), (b), and (c) are all incorrect because such statements are included in a compilation report.

71. Compiled financial statements for the prior year presented in comparative form with audited financial statements for the current year should be clearly marked to indicate their status and I. The report on the prior period should be reissued to accompany the current period report. II. The report on the current period should include as a separate paragraph a description of the responsibility assumed for the prior period's financial statements. a. I only b. II only c. Both I and II d. Either I or II

Correct Answer: D) Either I or II Notes (d) The requirement is to determine the proper reporting procedure for comparative financial statements for which the prior year is compiled, and the current year is audited. When compiled financial statements are presented in comparative form with audited financial statements, the report on the prior period may be reissued to accompany the current period report. In addition, the report on the current period may include a separate paragraph describing responsibility assumed for the prior period financial statements.

162. According to Public Company Accounting Oversight Board Standard 5, what type of transaction involves establishing a loan loss reserve? a. Substantive transaction. b. Routine transaction. c. Nonroutine transaction. d. Estimation transaction.

Correct Answer: D) Estimation transaction. Notes (d) The requirement is to identify the type of transaction that establishing loan loss reserves is. Answer (d) is correct because estimation transactions are activities involving management's judgments or assumptions, such as determining the allowance for doubtful accounts, establishing warranty reserves, and assessing assets for impairment. Answer (a) is incorrect because the term substantive transaction is not used in PCAOB standards. Answer (b) is incorrect because routine transactions are those for recurring activities, such as sales, purchases, cash receipts and disbursements, and payroll. Answer (c) is incorrect because nonroutine transactions occur only periodically, such as the taking of physical inventory, calculating depreciation expense, or adjusting for foreign currencies; nonroutine transactions generally are not a part of the routine flow of transactions.

107. When an independent audit report is incorporated by reference in a SEC registration statement, a prospectus that includes a statement about the independent accountant's involvement should refer to the independent accountant as a. Auditor of the financial reports. b. Management's designate before the SEC. c. Certified preparer of the report. d. Expert in auditing and accounting.

Correct Answer: D) Expert in auditing and accounting. Notes (d) The requirement is to determine the appropriate reference to an independent accountant in a prospectus (relating to an SEC registration statement) that includes a statement about his/her involvement with an independent audit report. AU-C 920 indicates that the independent accountant is an expert in auditing and accounting.

81. An auditor expressed a qualified opinion on the prior year's financial statements because of a lack of adequate disclosure. These financial statements are properly restated in the current year and presented in comparative form with the current year's financial statements. The auditor's updated report on the prior year's financial statements should a. Be accompanied by the auditor's original report on the prior year's financial statements. b. Continue to express a qualified opinion on the prior year's financial statements. c. Make no reference to the type of opinion expressed on the prior year's financial statements. d. Express an unmodified opinion on the restated financial statements of the prior year.

Correct Answer: D) Express an unmodified opinion on the restated financial statements of the prior year. Notes (d) The requirement is to determine auditor reporting responsibility when prior period financial statements which received a qualified opinion due to a lack of adequate disclosure have been restated to eliminate the lack of disclosure. Answer (d) is correct because an auditor should express an unmodified opinion on the restated financial statements of the prior year (with an emphasis-of-matter paragraph describing the circumstance). Answer (a) is incorrect because the auditor's original report is not reissued. Answer (b) is incorrect because the qualified opinion is eliminated. Answer (c) is incorrect because reference to the type of opinion expressed is included in the reissued report's emphasis-of-matter paragraph.

130. Which of the following is a prospective financial statement for general use upon which an accountant may appropriately report? a. Financial projection. b. Partial presentation. c. Pro forma financial statement. d. Financial forecast.

Correct Answer: D) Financial forecast. Notes (d) The requirement is to identify the type of general use prospective financial statement on which the accountant may appropriately report. Answer (d) is correct because financial forecasts are considered prospective financial statements, and they are appropriate for general use. Answer (a) is incorrect because financial projections are only appropriate for the party responsible for preparing them or for third parties with whom the responsible party is negotiating directly. Answers (b) and (c) are incorrect because partial presentations and pro forma financial statements are not considered prospective financial statements.

60. An auditor may issue the standard audit report when the a. Auditor refers to the findings of a specialist. b. Financial statements are derived and summarized from complete audited financial statements that are filed with a regulatory agency. c. Financial statements are prepared on the cash receipts and disbursements basis of accounting. d. Group engagement partner assumes responsibility for the work of a component auditor.

Correct Answer: D) Group engagement partner assumes responsibility for the work of a component auditor. Notes (d) The requirement is to identify the situation in which an auditor may issue the standard audit report. Answer (d) is correct because a standard report may be issued in circumstances in which the principal auditor assumes responsibility for the work of another auditor. Answer (a) is incorrect because the standard report does not include reference to a specialist. Thus, reference to a specialist within a report by definition causes modification of the standard report. Answer (b) is incorrect because the auditor is required to issue a modified report on condensed financial statements. Answer (c) is incorrect because audit reports on financial statements prepared using a financial reporting framework other than GAAP require departures from the standard form.

66. Jewel, CPA, audited Infinite Co.'s prior year financial statements. These statements are presented with those of the current year for comparative purposes without Jewel's auditor's report, which expressed a qualified opinion. In drafting the current year's auditor's report, Crain, CPA, the successor auditor, should I. Not name Jewel as the predecessor auditor. II. Indicate the type of report issued by Jewel. III. Indicate the substantive reasons for Jewel's qualification. a. I only b. I and II c. II and III d. I, II, and III

Correct Answer: D) I, II, and III Notes (d) The requirement is to determine the information to be included in an audit report on comparative financial statements when a predecessor auditor's report is not being reissued. Answer (d) is correct because an other-matter paragraph should be added to the successor's report and it should indicate (1) that the financial statements of the prior period were audited by another auditor (whose name is not presented), (2) the date of the predecessor's report, (3) the type of report issued by the predecessor, and (4) if the report was other than a standard report, the substantive reasons therefor.

7. How does an auditor make the following representations when issuing the standard public company auditor's report on comparative financial statements? I. Examination of evidence on a test basis II. Consistent application of accounting principles a. I. Explicitly ; II. Explicitly b. I. Implicitly ; II. Implicitly c. I. Implicitly ; II. Explicitly d. I. Explicitly ; II. Implicitly

Correct Answer: D) I. Explicitly ; II. Implicitly Notes (d) The requirement is to determine the representations made explicitly and implicitly when issuing a public company standard auditor's report on comparative financial statements. Answer (d) is correct because that audit report explicitly states that the examination of evidence is made on a test basis and implicitly assumes consistent application of accounting principles. Answer (a) is incorrect because consistency of application of accounting principles is not indicated explicitly. Answer (b) is incorrect because examination of evidence on a test basis is referred to explicitly. Answer (c) is incorrect because examination of evidence on a test basis is explicitly referred to and because consistent application of accounting principles is not explicitly referred to.

83. The financial statements of KCP America, a US entity, are prepared for inclusion in the consolidated financial statements of its non-US parent. These financial statements are prepared in conformity with the accounting principles generally accepted in the parent's country and are for use only in that country. How may KCP America's auditor report on these financial statements? I. A US-Style report (unmodified). II. A US-Style report on the accounting principles of the parent's country. III. The report form of the parent's country a. I only b. II only c. I and III d. II and III

Correct Answer: D) II and III Notes (d) The requirement is to determine the appropriate types of reports that may be issued when the financial statements of a US subsidiary are prepared following the principles of a non-US parent company's country for inclusion in that parent company's non-US consolidated financial statements. AU-C 910 allows either a modified US style report or the report form of the parent's country. A US style unmodified report is not appropriate.

43. When an auditor qualifies an opinion because of inadequate disclosure, the auditor should describe the nature of the omission in a basis for qualification paragraph and modify the I. Introductory paragraph II. Auditor responsibility paragraphs III. Opinion paragraph a. I only b. I and II c. II and III d. III only

Correct Answer: D) III only Notes (d) The requirement is to identify the paragraphs of an audit report that are modified when an auditor qualifies an opinion because of inadequate disclosure. In addition to requiring the inclusion of a separate basis for qualification matter paragraph, AU-C 705 indicates that only the opinion paragraph should be modified.

96. A modification of the CPA's report on a review of the interim financial statements of a publicly held company would be necessitated by which of the following? a. An uncertainty. b. Lack of consistency. c. Reference to another accountant. d. Inadequate disclosure.

Correct Answer: D) Inadequate disclosure. Notes (d) The requirement is to determine the circumstances which will lead to a modification of an interim report. Departures from generally accepted accounting principles, which include adequate disclosure, require modification of the accountant's report. Normally neither an uncertainty [answer (a)] nor a lack of consistency [answer (b)] would cause a report modification. Reference to another accountant [answer (c)] is not considered a modification.

183. In reporting on an entity's internal control over financial reporting, a practitioner should include a paragraph that describes the a. Documentary evidence regarding the control environment factors. b. Changes in internal control since the prior report. c. Potential benefits from the practitioner's suggested improvements. d. Inherent limitations of any internal control.

Correct Answer: D) Inherent limitations of any internal control. Notes (d) The requirement is to identify the statement that should be included in a CPA's report on a client's internal control over financial reporting. Answer (d) is correct because AT 501 requires that the report include a comment on the inherent limitations of any internal control.

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

Correct Answer: D) Is appropriate and would not negate the unmodified opinion. Notes (d) The requirement is to identify the proper statement about an audit report that includes a separate paragraph in an otherwise unmodified report that emphasizes that the entity being reported on had significant transactions with related parties. Answer (d) is correct because such emphasis of a matter does not negate the unmodified opinion. Answer (a) is incorrect because the report is considered unmodified. Answer (b) is incorrect because such emphasis of a matter does not violate generally accepted auditing standards if this information is disclosed in notes to the financial statements. Answer (c) is incorrect because the report should not include the phrase "with the foregoing explanation."

147. Lake, CPA, is auditing the financial statements of Gill Co. Gill uses the EDP Service Center, Inc. to process its payroll transactions. EDP's financial statements are audited by Cope, CPA, who recently issued a report on EDP's internal control. Lake is considering Cope's report on EDP's internal control in assessing control risk on the Gill engagement. What is Lake's responsibility concerning making reference to Cope as a basis, in part, for Lake's own opinion? a. Lake may refer to Cope only if Lake is satisfied as to Cope's professional reputation and independence. b. Lake may refer to Cope only if Lake relies on Cope's report in restricting the extent of substantive tests. c. Lake may refer to Cope only if Lake's report indicates the division of responsibility. d. Lake may not refer to Cope under the circumstances above.

Correct Answer: D) Lake may not refer to Cope under the circumstances above. Notes (d) The requirement is to determine the propriety of a computer "user" auditor (Lake) making reference to a service auditor's (Cope) report. Answer (d) is correct because the user auditor should not make reference to the report of the service auditor. See AU-C 402 for reports on the processing of transactions by service organizations.

156. Which of the following need not be included in management's report on internal control under Section 404a of the Sarbanes-Oxley Act of 2002? a. A statement that the company's auditor has issued an attestation report on management's assertion. b. Identification of the framework for evaluating internal control. c. Management's assessment of the effectiveness of internal control. d. Management's statement of responsibility to establish and maintain internal control that has no significant deficiencies.

Correct Answer: D) Management's statement of responsibility to establish and maintain internal control that has no significant deficiencies. Notes (d) The requirement is to identify which of the following need not be included in management's report on internal control under Section 404a of the Sarbanes-Oxley Act of 2002. Answer (d) is correct because, while the report must indicate that it is management's responsibility to establish and maintain adequate internal control, it need not also indicate that such control has no significant deficiencies. Answers (a), (b), and (c) are all incorrect because they include information that must be contained in management's report.

22. Davis, CPA, believes there is substantial doubt about the ability of Hill Co. to continue as a going concern for a reasonable period of time. In evaluating Hill's plans for dealing with the adverse effects of future conditions and events, Davis most likely would consider, as a mitigating factor, Hill's plans to a. Accelerate research and development projects related to future products. b. Accumulate treasury stock at prices favorable to Hill's historic price range. c. Purchase equipment and production facilities currently being leased. d. Negotiate reductions in required dividends being paid on preferred stock.

Correct Answer: D) Negotiate reductions in required dividends being paid on preferred stock. Notes (d) The requirement is to identify the factor which a CPA would most likely consider as mitigating substantial doubt about the ability of an entity to continue as a going concern. Answer (d) is correct because management's ability to negotiate reductions of required dividends will decrease required cash outflows, and thereby increase the likelihood that the entity will be able to continue as a going concern. AU-C 570 provides examples of information that might mitigate such concern. Answers (a), (b), and (c) are all incorrect because they involve spending cash, rather than reducing outflows of cash.

25. An auditor would express an unmodified opinion and add an emphasis-of-matter paragraph for I. An unjustified accounting change II. A material weakness in the internal control a. Both I and II b. I only c. II only d. Neither I nor II

Correct Answer: D) Neither I nor II Notes (d) The requirement is to determine whether an unjustified accounting change, a material weakness in internal control, or both, would cause an auditor to express an unmodified opinion with an emphasis-of-matter paragraph. Answer (d) is correct because an unjustified accounting change will result in either a qualified or an adverse opinion and a material weakness will ordinarily result in no report modification (see AU-C 265 for information on the treatment of material weaknesses); accordingly, an unmodified opinion with an emphasis-of-matter paragraph added to the auditor's report is not appropriate in either case.

53. When disclaiming an opinion due to a client-imposed scope limitation on a nonpublic company's financial statements, an auditor should indicate in a separate paragraph why the audit did not comply with generally accepted auditing standards. The auditor should also omit which of the two sections (paragraphs) below? I. Auditor responsibility II. Opinion a. II only b. Both I and II c. I only d. Neither I nor II

Correct Answer: D) Neither I nor II Notes (d) The requirement is to determine whether either the auditor's responsibility section, the opinion paragraph, or both should be deleted when an auditor is disclaiming an opinion due to a client-imposed scope limitation. Answer (d) is correct because neither the auditor responsibility section nor the opinion paragraph is deleted, although they are both modified Answer (a) is incorrect because it suggests that the opinion paragraph is omitted. Answer (b) is incorrect because it states that both the auditor responsibility paragraph and the opinion paragraph are omitted. Answer (c) is incorrect because it states that the opinion paragraph is omitted.

36. Which of the following phrases should be included in the opinion paragraph when an auditor expresses a qualified opinion? I. When read in conjunction with Note X II. With the foregoing explanation a. I only b. II only c. Both I and II d. Neither I nor II

Correct Answer: D) Neither I nor II Notes (d) The requirement is to determine whether the terms "when read in conjunction with Note X," and "with the foregoing explanation" should be included in the opinion paragraph of a qualified opinion. The professional standards state that an audit report with a qualified opinion should not include either phrase in the opinion paragraph.

70. The predecessor auditor, who is satisfied after properly communicating with the successor auditor, has reissued a report because the audit client desires comparative financial statements. The predecessor auditor's report should make a. Reference to the report of the successor auditor only in the scope paragraph. b. Reference to the work of the successor auditor in the scope and opinion paragraphs. c. Reference to both the work and the report of the successor auditor only in the opinion paragraph. d. No reference to the report or the work of the successor auditor.

Correct Answer: D) No reference to the report or the work of the successor auditor. Notes (d) The requirement is to determine the manner in which a predecessor auditor who has reissued a report for comparative financial statements should refer to the successor auditor. The predecessor auditor should not refer in the reissued report to the report or work of the successor auditor.

160. The minimum likelihood of loss involved in the consideration of a control deficiency is a. Remote. b. More than remote. c. Probable. d. Not explicitly considered.

Correct Answer: D) Not explicitly considered. Notes (d) The requirement is to identify the minimum likelihood of loss involved in the consideration of a control deficiency. Answer (d) is correct because a control deficiency is a condition in which the operation of a control does not allow management, or employees, in the normal course of performing their functions to prevent or detect misstatements on a timely basis—it does not explicitly consider likelihood of loss. Answer (a) is incorrect because the minimum likelihood of loss is not considered. Answer (b) is incorrect because the control deficiency occurrence of loss need not be more than remote. Answer (c) is incorrect because whether the minimum likelihood of loss is probable is not considered.

58. A group engagement partner decides not to refer to the audit of another CPA who audited a component of the overall group financial statements. After making inquiries about the other CPA's professional reputation and independence, the principal auditor most likely would a. Add an emphasis-of-matter paragraph to the auditor's report indicating that the subsidiary's financial statements are not material to the consolidated financial statements. b. Document in the engagement letter that the principal auditor assumes no responsibility for the other CPA's work and opinion. c. Obtain written permission from the other CPA to omit the reference in the principal auditor's report. d. Perform additional audit procedures based on the significance of the subsidiary.

Correct Answer: D) Perform additional audit procedures based on the significance of the subsidiary. Notes (d) The requirement is to determine a group engagement partner's responsibility, in addition to making inquiries of the other auditor's reputation and independence, after having decided not to refer to the audit of the component (other) auditor. Answer (d) is correct because when a decision is made not to make reference to the component auditor—that is, to take responsibility for that auditor's work—the group auditor should perform additional procedures dependent upon the significance of the component. Answer (a) is incorrect because no emphasis-of-matter paragraph is added to the audit report. Answer (b) is incorrect because the group engagement partner is assuming responsibility for the component auditor's work when a decision is made not to refer to the component auditor's report. Answer (c) is incorrect because written permission is not required when the group engagement partner is taking responsibility for the work of the other auditor.

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

Correct Answer: D) Postpone expenditures for research and development projects. Notes (d) The requirement is to identify the most likely mitigating factor a CPA would consider when a client's ability to continue as a going concern is in question. Answer (d) is correct because the ability to postpone expenditures for research and development projects may mitigate the circumstance. Answer (a) is incorrect because there is no guarantee that Zero's discussions with its lenders will lead to a restructuring of the debt and loan agreements. Only existing or committee agreements to restructure the debt would be considered a mitigating factor. Answer (b) is incorrect because weak internal control over cash disbursements may or may not have caused the going concern problem. Answer (c) is incorrect because an entity with a going concern problem is unlikely to be able to purchase such production facilities.

68. When single-year financial statements are presented, an auditor ordinarily would express a standard audit report if the a. Auditor is unable to obtain audited financial statements supporting the entity's investment in a foreign affiliate. b. Entity declines to present a statement of cash flows with its balance sheet and related statements of income and retained earnings. c. Auditor wishes to emphasize an accounting matter affecting the comparability of the financial statements with those of the prior year. d. Prior year's financial statements were audited by another CPA whose report, which expressed an unmodified opinion, is not presented.

Correct Answer: D) Prior year's financial statements were audited by another CPA whose report, which expressed an unmodified opinion, is not presented. Notes (d) The requirement is to identify the circumstance in which a standard unmodified report may be issued when single-year financial statements are presented. Answer (d) is correct because when the prior year's financial statements are not being presented, the CPA need not refer to them or include the predecessor auditor's report. Answer (a) is incorrect because inability to audit an investment in a foreign affiliate is a scope limitation that is likely to result in either a qualified opinion or a disclaimer. Answer (b) is incorrect because a qualified opinion is appropriate when an entity declines to present a statement of cash flows with its balance sheet and related statements of income and retained earnings. Answer (c) is incorrect because the emphasis of an accounting matter by an auditor results in inclusion of an emphasis-of-matter paragraph to the unmodified audit report.

73. When audited financial statements are presented in a client's document containing other information, the auditor should a. Perform inquiry and analytical procedures to ascertain whether the other information is reasonable. b. Add an emphasis-of-matter paragraph to the auditor's report without changing the opinion on the financial statements. c. Perform the appropriate substantive auditing procedures to corroborate the other information. d. Read the other information to determine that it is consistent with the audited financial statements.

Correct Answer: D) Read the other information to determine that it is consistent with the audited financial statements. Notes (d) The requirement is to determine an auditor's responsibility when audited financial statements are presented in a document containing other information. Answer (d) is correct because the auditor is required to read the other information to determine that it is consistent with the audited financial statements. Answers (a) and (c) are incorrect because no such inquiry, analytical procedures, or other substantive auditing procedures are required. Answer (b) is incorrect because, unless the information seems incorrect or inconsistent with the audited financial statements, no emphasis-of-matter paragraph needs to be added to the auditor's report.

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

Correct Answer: D) Refer to the financial statement note that discusses the change in detail. Notes (d) The requirement is to determine the information that must be presented when a client has changed accounting principles. Answer (d) is correct because in addition to identifying the nature of the change, the auditor must refer to the financial statement note that discusses the change in detail. Answer (a) is incorrect because while the auditor must believe that the change is justified, it is not necessary to explain it in the report. Answer (b) is incorrect because the cumulative effect of the change need not be described in the audit report. Answer (c) is incorrect because the auditor need not make explicit concurrence with the change.

134. An accountant's report on a review of pro forma financial information should include a a. Statement that the entity's internal control was not relied on in the review. b. Disclaimer of opinion on the financial statements from which the pro forma financial information is derived. c. Caveat that it is uncertain whether the transaction or event reflected in the pro forma financial information will ever occur. d. Reference to the financial statements from which the historical financial information is derived.

Correct Answer: D) Reference to the financial statements from which the historical financial information is derived. Notes (d) The requirement is to determine the statement that should be included in an accountant's report on a review of pro forma financial information. Answer (d) is correct because the report must include a reference to the financial statements from which the historical financial information is derived and a statement as to whether such financial statements were audited or reviewed.

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

Correct Answer: D) Refuses to acknowledge its responsibility for the fair presentation of the financial statements in conformity with GAAP. Notes (d) The requirement is to identify the circumstance in which a scope limitation is sufficient to preclude an unmodified opinion. Answer (d) is correct because AU-C 580 states that management's refusal to furnish such a written representation constitutes a limitation on the scope of an audit sufficient to preclude an unmodified opinion. Answers (a), (b), and (c) are all incorrect because while they represent scope limitations, they may sometimes not result in a report that is other than unmodified.

74. An auditor may express an opinion on an entity's accounts receivable balance even if the auditor has disclaimed an opinion on the financial statements taken as a whole provided the a. Report on the accounts receivable discloses the reason for the disclaimer of opinion on the financial statements. b. Distribution of the report on the accounts receivable is restricted to internal use only. c. Auditor also reports on the current asset portion of the entity's balance sheet. d. Report on the accounts receivable is presented separately from the disclaimer of opinion on the financial statements.

Correct Answer: D) Report on the accounts receivable is presented separately from the disclaimer of opinion on the financial statements. Notes (d) The requirement is to identify the manner in which an auditor may express an opinion on an entity's accounts receivable when that auditor has disclaimed an opinion on the financial statements taken as a whole. Answer (d) is correct because such a report is considered a "specified elements, accounts, or items report," and should include the opinion on the accounts receivable separately from the disclaimer of opinion on the financial statement. Answer (a) is incorrect because reason for the disclaimer of opinion need not be provided. Answer (b) is incorrect because distribution of such a report is not restricted to internal use only. Answer (c) is incorrect because the auditor need not report on the current asset portion of the entity's balance sheet to issue such a report.

163. How do the scope, procedures, and purpose of an examination of internal control compare to those for obtaining an understanding of internal control and assessing control risk as part of an audit? a. Scope: Similar ; Procedures: Different ; Purpose: Similar b. Scope: Different ; Procedures: Similar ; Purpose: Similar c. Scope: Different ; Procedures: Different ; Purpose: Different d. Scope: Different ; Procedures: Similar ; Purpose: Different

Correct Answer: D) Scope: Different ; Procedures: Similar ; Purpose: Different Notes (d) The requirement is to identify the relationship between an examination of internal control and obtaining an understanding of internal control and assessing control risk as part of an audit. Answer (d) is correct because, while the scope and purpose differ between the two types of engagements, the procedures followed are similar. See AT 501 (or PCAOB Standard 5) for information on reporting on an audit of internal control.

158. In an integrated audit, which of the following is defined as a weakness in internal control that is less severe than a material weakness but important enough to warrant attention by those responsible for oversight of the financial reporting function? a. Control deficiency. b. Unusual weakness. c. Unusual deficiency. d. Significant deficiency.

Correct Answer: D) Significant deficiency. Notes (d) The requirement is to identify the term that is defined as a weakness in internal control that is less severe than a material weakness but important enough to warrant attention by those responsible for oversight of the financial reporting function. Answer (d) is correct because this is the definition of a significant deficiency. Answer (a) is incorrect because a control deficiency exists when the design or operation of a control does not allow management, or employees, in the normal course of performing their functions to prevent or detect misstatements on a timely basis. Answer (b) is incorrect because an unusual weakness is not used in the standards for integrated audits. Answer (c) is incorrect because the term unusual deficiency is not used in the standards for integrated audits.

85. When an auditor reports on financial statements prepared on an entity's income tax basis, the auditor's report should a. Disclaim an opinion on whether the statements were examined in accordance with generally accepted auditing standards. b. Not express an opinion on whether the statements are presented in conformity with the financial reporting framework used. c. Include an explanation of how the results of operations differ from the cash receipts and disbursements basis of accounting. d. State that the basis of presentation is a financial reporting framework other than GAAP.

Correct Answer: D) State that the basis of presentation is a financial reporting framework other than GAAP. Notes (d) The requirement is to determine the information that should be included in an audit report on financial statements prepared on the income tax basis of accounting. AU-C 800 presents the form of the report to be issued. Answer (d) is correct because AU-C 800 requires that the report indicate that the income tax basis of accounting is a financial reporting framework other than GAAP.

182. Which of the following is not included in a standard unqualified opinion on internal control over financial reporting performed under PCAOB requirements? a. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. b. In our opinion, [company name] maintained, in all material respects, effective internal control over financial reporting. c. Our audit included obtaining an understanding of internal control over financial reporting. d. The [company name] management and audit committee is responsible for maintaining effective internal control over financial reporting.

Correct Answer: D) The [company name] management and audit committee is responsible for maintaining effective internal control over financial reporting. Notes (d) The requirement is to identify the statement not included in a standard unqualified opinion on internal control performed under PCAOB requirements. Answer (d) is correct because the report indicates that management is responsible for maintaining effective internal control over financial reporting, not management and the audit committee. Answers (a), (b) and (c) are all incorrect because they represent statements included in the audit report.

48. In which of the following circumstances would an auditor not express an unmodified opinion? a. There has been a material change between periods in accounting principles. b. Quarterly financial data required by the SEC has been omitted. c. The auditor wishes to emphasize an unusually important subsequent event. d. The auditor is unable to obtain audited financial statements of a consolidated investee.

Correct Answer: D) The auditor is unable to obtain audited financial statements of a consolidated investee. Notes (d) The requirement is to identify the circumstance in which an auditor would not express an unmodified opinion. Answer (d) is correct because an inability to obtain the audited financial statements of a consolidated investee represents a scope limitation, and a significant scope limitation results in either a qualified opinion or a disclaimer of opinion. Answer (a) is incorrect because a material change between periods in accounting principles will result in an emphasis-of-matter paragraph being added to a report with an unmodified opinion. Answer (b) is incorrect because the omission of the SEC required quarterly financial data, which is considered "unaudited," results in a report with an unmodified opinion with an emphasis-of-matter paragraph. Answer (c) is incorrect because an auditor's emphasis of an unusually important subsequent event results in a report with an unmodified opinion with an emphasis-of-matter paragraph.

148. Which of the following is correct relating to service organization control (SOC) reports referred to as "SOC 2" reports? a. They are primarily to assist financial statement auditors when processing services have been outsourced to a service provider. b. They are generally available to anyone. c. They relate most directly to internal control over financial reporting. d. They are meant for management of service organizations, user entities and certain other specified entities.

Correct Answer: D) They are meant for management of service organizations, user entities and certain other specified entities. Notes (d) The requirement is to identify the item that is true about SOC 2 reports. Answer (d) is correct as such reports are meant for management of service organizations, user entities and certain other specified entities. Answer (a) is incorrect because it is SOC 1 reports that are meant primarily to assist financial statement auditors. Answer (b) is incorrect because the reports are not meant to be generally available. Answer (c) is incorrect because they relate more directly to the SysTrust principles than they do to internal control over financial reporting.

105. Comfort letters ordinarily are addressed to a. Creditor financial institutions. b. The client's audit committee. c. The Securities and Exchange Commission. d. Underwriters of securities.

Correct Answer: D) Underwriters of securities. Notes (d) The requirement is to identify to whom comfort letters are ordinarily addressed. Answer (d) is correct because comfort letters, also referred to as letters for underwriters, are ordinarily addressed to underwriters.

76. If management declines to present supplementary information required by the Governmental Accounting Standards Board (GASB), the auditor should issue a(n) a. Adverse opinion. b. Qualified opinion with an other-matter paragraph. c. Unmodified opinion. d. Unmodified opinion with an additional other-matter paragraph.

Correct Answer: D) Unmodified opinion with an additional other-matter paragraph. Notes (d) The requirement is to determine the proper audit report when management declines to present supplementary information required by the Governmental Accounting Standards Board. Answer (d) is correct because omission of required supplementary information, which when presented is not considered audited, leads to an unmodified opinion with an other -matter paragraph. Answers (a) and (b) are incorrect because neither an adverse opinion nor a qualified opinion is appropriate since the supplementary information is not audited. Answer (c) is incorrect because it is incomplete since an unmodified opinion with an additional other-matter paragraph is required.

86. Helpful Co., a nonprofit entity, prepared its financial statements on an accounting basis prescribed by a regulatory agency solely for filing with that agency. Green audited the financial statements in accordance with generally accepted auditing standards and concluded that the financial statements were fairly presented on the prescribed basis. Green should issue a report with a(n) a. Qualified opinion. b. Adverse opinion c. Disclaimer of opinion. d. Unmodified opinion.

Correct Answer: D) Unmodified opinion. Notes (d) The requirement is to identify the appropriate type of audit report to be issued for a nonprofit entity's financial statements prepared following an accounting basis prescribed by a regulatory agency solely for filing with that agency. Answer (d) is correct because an unmodified opinion is appropriate given that the financial statements are fairly presented; the report will include a paragraph indicating that a basis other than GAAP is being followed. Answer (a) is incorrect because an unmodified report may be issued if there are no departures from the prescribed basis. The report would not be qualified because the financial statements were prepared using an accounting basis prescribed by a regulatory agency. Answer (b) is incorrect because an adverse opinion is not appropriate when the information is properly presented. Answer (c) is incorrect because a disclaimer of opinion need not be issued.

32. An uncertainty facing the firm relating to the possible future results of litigation filed against client is most likely to result in which of the following types of audit report? a. Adverse with a basis for adverse opinion paragraph. b. Qualified due to a scope limitation. c. Qualified with a basis for qualification paragraph. d. Unqualified with emphasis-of-matter paragraph.

Correct Answer: D) Unqualified with emphasis-of-matter paragraph. Notes (d) The requirement is to identify the proper audit report relating to an uncertainty arising due to litigation. Answer (d) is correct because an uncertainty may result in either a an unqualified opinion with an emphasis-of-matter paragraph or a disclaimer. Answer (a) is incorrect because an adverse opinion is not appropriate. Answers (c) and (d) are incorrect because a qualified opinion is not appropriate.

164. A procedure that involves tracing a transaction from its origination through the company's information systems until it is reflected in the company's financial report is referred to as a(n) a. Analytical analysis. b. Substantive procedure. c. Test of a control. d. Walk-through.

Correct Answer: D) Walk-through. Notes (d) The requirement is to identify the procedure that involves tracing a transaction from origination through the company's information systems until it is reflected in the company's financial report. Answer (d) is correct because this is the approach followed in a walk-through. Answer (a) is incorrect because analytical analysis is a general term that simply suggests a general analysis. Answer (b) is incorrect because a substantive procedure addresses the correctness of a particular financial statement amount or disclosure. Answer (c) is incorrect because a test of a control addresses the operating effectiveness of a control.

139. The WebTrust seal of assurance relates most directly to a. Financial statements maintained on the Internet. b. Health care facilities. c. Risk assurance procedures. d. Websites.

Correct Answer: D) Websites. Notes (d) The requirement is to identify what the WebTrust seal of assurance relates most directly to. Answer (d) is correct because the WebTrust seal is designed to provide assurance on website security, availability, processing integrity, online privacy and confidentiality. Answers (a), (b), and (c) are all incorrect since WebTrust isn't specially aimed at financial statements, health care facilities, or risk assurance procedures.