ACCT 470 - EX1

When financial statements are materially but not pervasively misstated, an auditor may express a Qualified Opinion | Disclaimer of an Opinion A. Yes, No B. Yes, Yes C. No, Yes D. No, No

Answer (A) is correct. A material misstatement results in either a qualified or an adverse opinion. The auditor must exercise judgment as to whether the misstatement is pervasive. If the misstatement is not pervasive, the auditor should express a qualified opinion.

Which of the following statements best explains why the CPA profession has found it essential to establish ethical standards and means for ensuring their observance? A. A distinguishing mark of a profession is its acceptance of responsibility to the public. B. A requirement for a profession is to establish ethical standards that stress primarily a responsibility to clients and colleagues. C. Ethical standards that emphasize excellence in performance over material rewards establish a reputation for competence and character. D. Vigorous enforcement of an established code of ethics is the best way to prevent unscrupulous acts.

Answer (A) is correct. According to Article II of the Principles section of the AICPA Code of Professional Conduct, "Members should accept the obligation to act in a way that will serve the public interest, honor the public trust, and demonstrate commitment to professionalism." According to the accompanying explanation, "A distinguishing mark of a profession is acceptance of its responsibility to the public."

Seripak Corporation made a material change in accounting principle with which the auditor concurs. The auditor should express A. An unmodified opinion with an emphasis-of-matter paragraph. B. A qualified opinion with an emphasis-of-matter paragraph. C. An adverse opinion with an emphasis-of-matter paragraph. D. An "except for" opinion without an emphasis-of-matter paragraph.

Answer (A) is correct. An auditor includes an emphasis-of-matter paragraph in the audit report when a material change in accounting principle has occurred. If (1) the new principle and the method of accounting for the effect of the change are in accordance with the applicable reporting framework, (2) disclosures are adequate, and (3) the entity has justified that the principle is preferable, the opinion is unmodified.

An auditor may express a qualified opinion for which of the following reasons? Circumstances Related to the Work | Limitations Imposed by Management A. Yes, Yes B. Yes, No C. No,Yes D. No ,No

Answer (A) is correct. An auditor may express a qualified opinion due to an inability to obtain sufficient appropriate audit evidence if the possible effects are material but not pervasive. The inability to obtain sufficient audit evidence (also called a scope limitation) may result from (1) circumstances not controlled by the entity, such as destruction or government seizure of accounting records; (2) circumstances related to the nature or timing of the work, such as not being able to (a) observe inventory due to the late appointment of the auditor, (b) obtain an investee's financial information, or (c) determine that controls are ineffective; or (3) limitations imposed by management, such as preventing the auditor from observing inventory or confirming receivables (AU-C 705).

In which situation is the auditor most likely not to include an emphasis-of-matter paragraph in the auditor's report? A. An important audit procedure was performed. B. The client suffered a major catastrophe. C. Significant transactions with related parties were recorded. D. Unusually important subsequent events occurred.

Answer (A) is correct. An emphasis-of-matter paragraph is not used to describe an audit procedure. It is used to draw attention to a matter appropriately presented or disclosed in the financial statements that is fundamental to users' understanding. The following are examples of circumstances in which the auditor may need to include an emphasis-of-matter paragraph: (1) an uncertainty relating to the future outcome of unusually important litigation or regulatory action; (2) a major catastrophe that has had, or continues to have, a significant effect on the entity's financial position; (3) significant transactions with related parties; and (4) unusually important subsequent events.

A separate paragraph of an auditor's report describes an uncertainty as follows: As discussed in Note X to the financial statements, the Company is a defendant in a lawsuit alleging infringement of certain patent rights and claiming damages. Discovery proceedings are in progress. What type of opinion should the auditor express under these circumstances? A. Unmodified. B. "Subject to" qualified. C. "Except for" qualified. D. Disclaimer.

Answer (A) is correct. Audit standards do not require the addition of an uncertainties paragraph. However, standards provide the auditor with the option of emphasizing a matter regarding the financial statements by adding an emphasis-of-matter paragraph. This paragraph does not affect the opinion expressed on the financial statements.

An audit of the financial statements of Camden Corporation is being conducted by an external auditor. The external auditor is expected to _________. A. Express an opinion as to the fairness of Camden's financial statements. B. Express an opinion as to the attractiveness of Camden for investment purposes and critique the wisdom and legality of its business decisions. C. Certify the correctness of Camden's financial statements. D. Make a 100% examination of Camden's records.

Answer (A) is correct. Auditing standards require the auditor to express an opinion regarding the financial statements as a whole or to assert that an opinion cannot be expressed. An opinion states whether the financial statements are presented fairly, in all material respects, in accordance with an applicable financial reporting framework.

Green, CPA, was engaged to audit the financial statements of Essex Co. after its fiscal year had ended. The timing of Green's appointment as auditor and the start of field work made confirmation of accounts receivable by direct communication with the debtors ineffective. However, Green applied other procedures and was satisfied as to the reasonableness of the account balances. Green's auditor's report most likely contained a(n) A. Unmodified opinion. B. Unmodified opinion with an emphasis-of-matter paragraph. C. Qualified opinion because of a scope limitation. D. Qualified opinion because of a departure from auditing standards.

Answer (A) is correct. Because the CPA is satisfied as to the amounts of receivables, no scope limitation exists. Accordingly, the report need not refer to the omission of the procedures or the use of alternative procedures, and the CPA may express an unmodified opinion.

In assessing whether to accept a client for an audit engagement, a CPA should consider the Client's Business Risk | CPA's Business Risk A. Yes, Yes B. Yes, No C. No. Yes D. No, No

Answer (A) is correct. Before accepting an engagement, the CPA should consider the risks of being associated with the client. Auditor business risk relates to potential loss or injury to the auditor's professional practice from litigation and adverse publicity from the relationship with the client. The successful outcome of an audit and the ability to control auditor business risk often depends on the client's business risk. The auditor's understanding of the entity's business risks increases the likelihood of identifying risks of material misstatement. Thus, QC 10 states that policies and procedures should be established regarding acceptance and continuance of clients and specific engagements. They should provide reasonable assurance that the firm will undertake or continue relationships only when it does not have information leading to the conclusion that the client lacks integrity.

If management fails to justify a material change in accounting principle, the auditor should A. Add a basis for modified opinion paragraph to the report and express a qualified or an adverse opinion. B. Disclaim an opinion because of uncertainty. C. Disclose the matter in a separate emphasis-of-matter paragraph but not modify the opinion paragraph. D. Neither modify the opinion nor disclose the matter because both principles are generally accepted.

Answer (A) is correct. If (1) the new principle and the method of accounting for the effect of the change are in accordance with the applicable reporting framework, (2) disclosures are adequate, and (3) the entity has justified that the principle is preferable, the auditor expresses an unmodified opinion. Otherwise, if the change is material, the misstatement results in expression of a qualified or an adverse opinion in the report for the year of change. A basis for modified opinion paragraph is added preceding the opinion paragraph.

An auditor has previously expressed a qualified opinion on the financial statements of a prior period because of a material misstatement. The prior-period financial statements are restated in the current period to conform with the applicable reporting framework. The auditor's updated report on the prior-period financial statements should A. Express an unmodified opinion concerning the restated financial statements. B. Be accompanied by the original auditor's report on the prior period. C. Bear the same date as the original auditor's report on the prior period. D. Qualify the opinion concerning the restated financial statements because of a change in accounting principle.

Answer (A) is correct. If an auditor has previously modified the opinion on statements of a prior year because of a material misstatement, and the statements are subsequently restated in conformity with the applicable reporting framework, the auditor's updated report on the prior period's statements should indicate that they have been restated and should express an unmodified opinion.

A CPA wishes to determine how various issuers have complied with the disclosure requirements in a new Accounting Standards Update. Which of the following information sources would the CPA most likely consult for this information? A. AICPA Accounting Trends & Techniques. B. FASB Technical Bulletins. C. AICPA Audit and Accounting Manual. D. FASB Statements of Financial Accounting Concepts.

Answer (A) is correct. Practical guidance for conducting accounting and audit engagements can be found in various nonauthoritative publications, such as Accounting Trends and Techniques, which describes current practice regarding corporate financial accounting and disclosure policies. It is a useful source for practitioners in industry and public practice. This annual AICPA publication is based on a survey of the annual financial reports of over 600 public companies.

Which of the following is a false statement about the relationship of financial statement assertions and audit procedures? A. The relationship between financial statement assertions and audit procedures should be one-to-one. B. Audit procedures should be developed in light of financial statement assertions about the financial statement components. C. Selection of tests of financial statement assertions should depend upon the understanding of internal control. D. The auditor should resolve any substantial doubt about any of management's relevant financial statement assertions.

Answer (A) is correct. Some auditing procedures may relate to more than one assertion. But a combination of auditing procedures may be needed to test a single relevant assertion because audit evidence from different sources or of a different nature may be relevant to the same assertion. For example, when relating controls to assertions, the auditor may determine that multiple controls are needed to address a risk and the related assertion.

Analytical procedures can best be categorized as A. Substantive procedures. B. Tests of controls. C. Qualitative tests. D. Budget comparisons.

Answer (A) is correct. Substantive procedures are designed to detect material misstatements at the assertion level. According to AU-C 520, Analytical Procedures, analytical procedures consist of evaluations of financial information made by a study of plausible relationships among both financial and nonfinancial data. They involve comparisons of recorded amounts, or ratios developed from recorded amounts, to expectations developed by the auditor.

The primary difference between an audit of the balance sheet and an audit of the income statement is that the audit of the income statement deals with the verification of A. Transactions. B. Authorizations. C. Costs. D. Cutoffs.

Answer (A) is correct. The audit of the income statement focuses on the propriety of handling transactions because most income statement accounts represent large volumes of transactions. The audit of the balance sheet concentrates on verification of account balances.

The date of the audit report is important because A. The auditor cannot date the report earlier than the date on which sufficient appropriate evidence to support the opinion has been obtained. B. The auditor bills time to the client up to and including the audit report date, and the statement to the client should reflect this date. C. Auditing standards require all audits to be performed on a timely basis. D. It should coincide with the date of the financial statements.

Answer (A) is correct. The auditor cannot date the report until sufficient appropriate evidence has been obtained. This date informs users that the auditor has considered the effects of events and transactions occurring up to that date of which the auditor became aware.

Adequate disclosure means that sufficient information is presented so that financial statements are not misleading. The decisions about adequate disclosure should reflect the needs of A. Users with a reasonable knowledge of business. B. All readers of the financial statements. C. Experts in accounting and finance. D. Governmental regulatory agencies.

Answer (A) is correct. The auditor considers the needs of users of the financial statements. However, it is reasonable for the auditor to assume that users (1) have reasonable knowledge of business and accounting, (2) are willing to study financial information with reasonable diligence, (3) understand the materiality limits of audited statements, (4) recognize that many amounts in the statements are based on estimates and judgments, and (5) make reasonable decisions based on the statements.

Before accepting an engagement to audit a new client, an auditor is required to A. Make inquiries of the predecessor auditor after obtaining the consent of the prospective client. B. Obtain the prospective client's signature to the engagement letter. C. Prepare a memorandum setting forth the staffing requirements and documenting the preliminary audit plan. D. Discuss the management representation letter with the prospective client's audit committee.

Answer (A) is correct. The auditor should request management to authorize the predecessor to respond fully to inquires. The auditor should inquire about (1) reasons for the change in auditors, (2) disagreements with management about accounting policies and auditing procedures, (3) facts being on management's integrity, (4) communications to those charged with governance about fraud or noncompliance, and (5) communications to those charged with governance or management about internal control problems (AU-C 210, Terms of Engagement).

A CPA auditing an electric utility wishes to determine whether all customers are being billed. The CPA's best direction of test is from the A. Meter department records to the billing (sales) register. B. Billing (sales) register to the meter department records. C. Accounts receivable ledger to the billing (sales) register. D. Billing (sales) register to the accounts receivable ledger.

Answer (A) is correct. The best direction of testing is to proceed from the meter department records, which indicate those customers who have received service, to the billing (sales) register. Comparing services rendered with billings is the best way to detect omitted billings.

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, Year 1. That doubt has been removed in Year 2. What is Mead's reporting responsibility if Tech is presenting its financial statements for the year ended June 30, Year 2, on a comparative basis with those of Year 1? A. The emphasis-of-matter paragraph included in the Year 1 auditor's report should not be repeated. B. The emphasis-of-matter paragraph included in the Year 1 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.

Answer (A) is correct. The emphasis-of-matter paragraph included in the previous report should not be repeated in subsequent reports if the doubt has been resolved.

The objective of performing analytical procedures in planning an audit is to identify the existence of A. Unusual transactions and events. B. Noncompliance with laws and regulations that went undetected because of internal control deficiency. C. Related party transactions. D. Recorded transactions that were not properly authorized.

Answer (A) is correct. The objective of analytical procedures is to identify such things as the existence of unusual transactions and events, and amounts, ratios, and trends that might indicate matters that have financial statement and audit planning ramifications.

An auditor strives to achieve independence in appearance to ____________. A. Maintain public confidence in the profession. B. Become independent in fact. C. Comply with the generally accepted auditing standards of field work. D. Maintain an unbiased mental attitude.

Answer (A) is correct. Third parties depend on the CPA's report because (s)he is viewed as possessing the necessary impartiality. Public confidence would be impaired if such objectivity even appeared to be lacking. The auditor must guard against the presumption of a loss of independence in addition to maintaining independence of mind.

Analytical procedures enable the auditor to predict the balance or quantity of an item under audit. Information to develop this estimate can be obtained from all of the following except A. Tracing transactions through the system to determine whether procedures are being applied as prescribed. B. Comparison of financial data with data for comparable prior periods, anticipated results (e.g., budgets and forecasts), and similar data for the industry in which the entity operates. C. Study of the relationships of elements of financial data that would be expected to conform to a predictable pattern based upon the entity's experience. D. Study of the relationships of financial data with relevant nonfinancial data.

Answer (A) is correct. Tracing transactions through the system is a test of controls directed toward the operating effectiveness of internal control, not an analytical procedure.

A client makes test counts on the basis of a statistical plan. The auditor observes such counts as are deemed necessary and is able to become satisfied as to the reliability of the client's procedures. In reporting on the results of the audit, the auditor A. Can express an unmodified opinion. B. Must comment in the auditor's responsibility section as to the inability to observe year-end inventories. C. Is required to disclaim an opinion if the inventories were material. D. Must qualify the opinion if the inventories were material.

Answer (A) is correct. When the client uses statistical sampling to determine inventory quantities, the auditor must become satisfied that the procedures are reliable. The auditor must observe at least some counts and must be satisfied that the sampling plan is reasonable and statistically valid, that it has been properly applied, and that its results are reasonable. Given no significant scope limitation, the report need not refer to failure to observe a year-end physical count or to the alternative procedures employed. The auditor may express an unmodified opinion.

An auditor has been engaged by the State Bank to audit the XYZ Corporation in conjunction with a loan commitment. The report would most likely be addressed to A. The shareholders, XYZ Corporation. B. The State Bank. C. The board of directors, XYZ Corporation. D. Whom it may concern.

Answer (B) is correct. Occasionally, an auditor is retained to audit the financial statements of an entity that is not his/her client. In such a case, the report customarily is addressed to the client and not to those charged with governance of the entity whose financial statements are being audited.

When the financial statements contain a misstatement, the effect of which is material but not pervasive, the auditor should A. Qualify the opinion and include a basis for qualified opinion paragraph that describes the matter resulting in the qualification. B. Qualify the opinion and describe the misstatement within the opinion paragraph. C. Disclaim an opinion and explain the effect of the misstatement in a disclaimer of opinion paragraph. D. Disclaim an opinion and describe the misstatement within the opinion paragraph.

Answer (A) is correct. When the financial statements are materially misstated, but the effects are not pervasive, the auditor should express a qualified opinion. The report should contain a basis for qualified opinion paragraph preceding the opinion paragraph. If the material misstatement relates to specific amounts, the basis paragraph should describe and quantify the financial effects, if practicable. If the misstatement relates to narrative disclosures, the auditor should include an explanation. If the misstatement relates to an omission of required information, the auditor should describe the nature of the information and, if practicable, include the information. The opinion paragraph should refer to the basis paragraph.

According to the IFAC's Code of Ethics for Professional Accountants, A. A contingent fee arrangement may create a self-interest threat. B. An auditor may not receive a referral fee. C. An auditor may not receive a commission. D. Fees may be too high but not too low.

Answer (A) is correct. Contingent fees may create a self-interest threat to objectivity depending on factors including (1) the nature of the engagement, (2) the range of amounts, (3) the basis for the fee, and (4) whether the result is to be reviewed by an independent third party.

The following additional paragraph was included in an auditor's report to indicate a lack of consistency: "As discussed in note T to the financial statements, the company changed its method of computing depreciation in Year 1." How should the auditor report on this matter if the auditor concurred with the change? Type of Opinion | Location of Additional Paragraph A. Unmodified , Before Opinion paragraph B. Unmodified, After Opinion paragraph C. Qualified,Before Opinion paragraph D. Qualified, After Opinion paragraph

Answer (B) is correct. A change in accounting principle meeting certain criteria and having a material effect on the financial statements requires the auditor to refer to the change in an emphasis-of-matter paragraph of the report. This paragraph should follow the opinion paragraph, describe the change, and refer to the entity's disclosure.

Most of the auditor's work in forming an opinion on financial statements consists of A. Understanding internal control. B. Obtaining and evaluating audit evidence. C. Examining cash transactions. D. Comparing recorded accountability with assets.

Answer (B) is correct. According to AU-C 500, Audit Evidence, most of the auditor's work in forming an opinion on financial statements consists of obtaining and evaluating audit evidence. Audit evidence is the information used by the auditor in drawing the conclusions on which the auditor's opinion is based. It includes the information contained in the accounting records and other information.

When an auditor expresses an adverse opinion, the opinion paragraph should include A. The effects of the material misstatement. B. A direct reference to a separate paragraph disclosing the basis for the opinion. C. The financial effects of the misstatement. D. A description of the uncertainty or scope limitation that prevents an unmodified opinion.

Answer (B) is correct. An adverse opinion states that the financial statements are not fairly presented in accordance with the applicable financial reporting framework. When an adverse opinion is expressed, the opinion paragraph should directly refer to a basis for adverse opinion paragraph that discloses the basis for the adverse opinion. This paragraph should precede the opinion paragraph (AU-C 705).

The securities of Donley Corporation are listed on a regional stock exchange and registered with the SEC. The management of Donley engages a CPA to perform an independent audit of Donley's financial statements. The primary objective of this audit is to provide assurance to the ____. A. Regional stock exchange. B. Investors in Donley securities. C. Securities and Exchange Commission. D. Board of directors of Donley.

Answer (B) is correct. An audit's primary objective is to provide assurance to the external users of financial statements that they present fairly, in all material respects, the financial position, results of operations, and cash flows of the company. Users include creditors, investors, and potential investors.

When qualifying an opinion because of an insufficiency of appropriate audit evidence, an auditor should refer to the situation in the Auditor's Responsibility Section | Notes to Financial Statements A. Yes, Yes B. Yes, No C. No, Yes D. No, No

Answer (B) is correct. An auditor may express a qualified opinion due to an inability to obtain sufficient appropriate audit evidence if the possible effects are material but not pervasive. But the notes to the financial statements are unchanged because they were not drafted by the auditor. Moreover, a sentence in the auditor's responsibility section states, "We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified audit opinion."

Auditors try to identify predictable relationships when using analytical procedures. Relationships involving transactions from which of the following accounts most likely would yield the highest level of evidence? A. Accounts receivable. B. Interest expense. C. Accounts payable. D. Travel and entertainment expense.

Answer (B) is correct. Analytical procedures are evaluations of financial information based on plausible relationships among financial and nonfinancial data. They involve comparisons of recorded amounts with expectations developed by the auditor. Thus, analytical procedures provide the best evidence regarding interest expense because the relationship among recorded debt, interest charged on the debt, and the passage of time (the factors determining interest expense for the period) is known by the auditor. Hence, interest expense is reasonably predictable.

A major purpose of the auditor's report on financial statements is to A. Assure investors of the complete accuracy of the financial statements. B. Clarify for the public the nature of the auditor's responsibility and performance. C. Deter creditors from extending loans in high-risk situations. D. Describe the specific auditing procedures undertaken to gather evidence for the opinion.

Answer (B) is correct. One of the highest priorities of the AICPA has been to reduce the gap between the nature of the auditor's responsibility and performance and the public's perception of the audit function. The auditor's report issued in accordance with auditing standards clarifies the role of the auditor with the intention of diminishing the gap.

Which of the following presumptions is least likely to relate to the reliability of audit evidence? A. The more effective internal control is, the more assurance it provides about the accounting data and financial statements. B. An auditor's opinion is formed within a reasonable time to achieve a balance between benefit and cost. C. Evidence obtained from independent sources outside the entity is more reliable than evidence secured solely within the entity. D. The auditor's direct personal knowledge obtained through observation and inspection is more persuasive than information obtained indirectly.

Answer (B) is correct. Appropriate audit evidence is relevant and reliable. Evidence is usually more reliable when it (1) is obtained from independent sources; (2) is generated internally under effective internal control; (3) is obtained directly by the auditor; (4) is in documentary form, whether paper, electronic, or other medium; and (5) consists of original documents. However, the need for (1) reporting to be timely and (2) maintaining a balance between benefit and cost are inherent limitations of the audit. Thus, for the opinion to be relevant, it must be formed within a reasonable period of time.

The objective of the audit of GAAP-based financial statements is to A. Make suggestions as to the form or content of the financial statements or to draft them in whole or in part. B. Express an opinion on the fairness with which the statements present financial position, results of operations, and cash flows in accordance with generally accepted accounting principles. C. Ensure adoption of sound accounting policies and the establishment and maintenance of internal control. D. Express an opinion on the accuracy with which the statements present financial position, results of operations, and cash flows in accordance with generally accepted accounting principles.

Answer (B) is correct. Based on an audit, the auditor expresses an opinion (or a disclaimer of opinion) on the fairness, in all material respects, of the presentation of financial statements, i.e., on whether they will be misleading to users.

Without affecting the CPA's willingness to express an unmodified opinion on the client's U.S.-GAAP-based financial statements, corporate management may refuse a request to A. Authorize its attorney to confirm that a list of pending or threatened litigation prepared by management includes all items known to the attorney. B. Change its basis of accounting for inventories from FIFO to LIFO because, in the opinion of the CPA, the FIFO method fails to give adequate recognition to the extraordinary increases in prices of merchandise acquired and held by the company. C. Write down to salvage value certain equipment that is no longer useful. D. Allow the CPA to examine tax returns for years prior to that of the financial statements being audited.

Answer (B) is correct. FIFO (first-in, first-out) and LIFO (last-in, first-out) are both methods of accounting for inventories that are generally accepted in the U.S. LIFO has the advantage during periods of inflation of matching current costs with current revenues. An independent auditor who has requested a change from FIFO to LIFO is likely to express an unmodified opinion even if management refuses to do so because the financial statements would still conform with U.S. GAAP.

If financial statements are to meet the requirements of adequate disclosure, A. All information pertaining to the company must be disclosed in the statements or related notes, even though some of the disclosures are potentially detrimental to the company or its shareholders. B. All information believed by the auditor to be essential to the fair presentation of the financial statements must be disclosed, no matter how confidential management believes the data to be. C. Statement notes should be written in very technical language to avoid misinterpretation by the reader. D. A statement note must clearly detail any deficiencies contained in the financial statements themselves.

Answer (B) is correct. In considering the adequacy of disclosure, the auditor necessarily uses confidential client information. Otherwise, forming an opinion on the statements would be difficult. To the extent required by GAAP or an other appropriate financial reporting framework, such information must be disclosed. But beyond these requirements, the auditor who discloses confidential information without specific consent violates Conduct Rule 301, Confidential Client Information....

Analytical procedures reveal significant unexpected differences between recorded amounts and the expectations developed by the auditor. If management is unable to provide an acceptable explanation, the auditor should A. Consider the matter a scope limitation. B. Perform additional audit procedures to investigate the matter further. C. Intensify the audit with the expectation of detecting management fraud. D. Withdraw from the engagement.

Answer (B) is correct. Inconsistent fluctuations or relationships or significant differences should result in (1) inquiries of management, (2) corroboration of responses with other audit evidence, and (3) performance of any necessary other procedures. Moreover, the RMMs due to fraud should be considered.

Users of an issuer's financial statements demand independent audits because _______. A. Users demand assurance that fraud does not exist. B. Management may not be objective in reporting. C. Users expect auditors to correct management errors. D. Management relies on the auditor to improve internal control.

Answer (B) is correct. Management and financial statement users may have an adversarial relationship because their interests in the firm are different. The independent auditor provides assurance that the financial statements are not biased for or against any interest

In which of the following situations would an auditor ordinarily choose between expressing a qualified opinion and 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 the applicable reporting framework. 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.

Answer (B) is correct. Misstatements, including inadequate disclosures, may result in either a qualified or an adverse opinion. The auditor should exercise judgment about materiality by considering such factors as (1) benchmarks for dollar amounts, (2) significance to the statements and the entity, and (3) pervasiveness. If the misstatement is not pervasive, the auditor should express a qualified opinion.

Notes that are included with financial statements are the responsibility of the _________. A. Securities and Exchange Commission. B. Company's management. C. Independent auditor. D. Internal auditor.

Answer (B) is correct. The notes are considered part of the basic financial statements. Because management has the primary responsibility for the financial statements, it also has the primary responsibility for the fairness of information included in notes.

An auditor must obtain professional experience primarily to _______. A. Receive a positive employment evaluation. B. Exercise professional judgment. C. Receive a favorable peer review. D. Earn a specialty designation by the AICPA.

Answer (B) is correct. Professional judgment is essential to perform an audit properly. An auditor must interpret relevant ethical requirements and GAAS and make informed decisions during the audit. Such interpretations and decisions require competencies developed through relevant training, knowledge, and experience (AU-C 200).

The AICPA Code of Professional Conduct contains both general ethical principles that are aspirational in character and also a __________. A. List of violations that would cause the automatic suspension of a member's license. B. Set of specific, mandatory rules describing minimum levels of conduct a member must maintain. C. Description of a member's procedures for responding to an inquiry from a trial board. D. List of specific acts discreditable to the profession.

Answer (B) is correct. The AICPA Code contains two sections: Principles and Rules. The principles are goal-oriented. The rules provide more specific guidance. The principles call for an unswerving commitment to honorable behavior but are not mandatory. Members who fail to comply with the rules, however, may face disciplinary action.

Assurance services are best described as ____________. A. Services designed for the improvement of operations, resulting in better outcomes. B. Independent professional services that improve the quality of information, or its context, for decision makers. C. The assembly of financial statements based on information and assumptions of a responsible party. D. Services designed to express an opinion on historical financial statements based on the results of an audit.

Answer (B) is correct. The AICPA defines assurance services as "independent professional services that improve the quality of information, or its context, for decision makers." Assurance services encompass audit and other attestation services but also include nonstandard services. Assurance services do not encompass consulting services.

The AICPA Code of Professional Conduct requires compliance with accounting principles promulgated by the bodies designated by the AICPA Council to establish such principles. The literature considered officially established accounting principles includes A. Statements on Auditing Standards. B. The FASB Accounting Standards Codification. C. Accounting textbooks. D. CPA firm position papers.

Answer (B) is correct. The FASB Accounting Standards Codification is the source of authoritative guidance for all public and nonpublic nongovernmental entities.

Which of the following statements about audit evidence is true? A. To be appropriate, audit evidence should be either persuasive or relevant but need not be both. B. The sufficiency and appropriateness of audit evidence is a matter of professional judgment. C. The difficulty and expense of obtaining audit evidence about an account balance is a valid basis for omitting the test. D. A client's accounting records can be sufficient audit evidence to support the financial statements.

Answer (B) is correct. The auditor exercises professional judgment when forming a conclusion about whether sufficient appropriate audit evidence has been obtained to reduce audit risk to an acceptably low level. Sufficiency measures the quantity of audit evidence. Appropriateness measures its quality (relevance and reliability). To form this conclusion, the auditor considers all relevant evidence, regardless of whether it corroborates or contradicts the assertions in the statements.

An auditor is required to obtain an understanding of the entity's business, including business cycles and reasons for business fluctuations. What is the audit purpose most directly served by obtaining this understanding? A. To enable the auditor to accurately identify significant deficiencies and material weaknesses. B. To assist the auditor to accurately interpret information obtained during an audit. C. To allow the auditor to more accurately perform tests of controls. D. To decide whether it will be necessary to perform analytical procedures.

Answer (B) is correct. The auditor performs risk assessment procedures to obtain an understanding of the entity and its environment, including its internal control, to assess the risks of material misstatement. The understanding addresses, for example, (1) the nature of the entity; (2) transactions, balances, and disclosures; (3) objectives, strategies, and business risks; (4) accounting practices; and (5) financial performance. This understanding is necessary for the auditor to interpret the audit evidence obtained and to determine its sufficiency and appropriateness.

Which of the following ultimately determines the specific audit procedures necessary to provide an independent auditor with a reasonable basis for the expression of an opinion? A. The audit plan. B. The auditor's judgment. C. Auditing standards. D. The audit documentation.

Answer (B) is correct. The auditor's professional judgment must determine the necessary audit plans and the specific audit procedures that will gather sufficient appropriate evidence to reduce audit risk to an acceptably low level and enable the auditor to draw reasonable conclusions on which to base the opinion.

Which of the following statements is true concerning an auditor's responsibilities regarding financial statements? A. Making suggestions that are adopted about the form and content of an entity's financial statements impairs an auditor's independence. B. An auditor may draft an entity's financial statements based on information from management's accounting system. C. The fair presentation of audited financial statements in conformity with GAAP is an implicit part of the auditor's responsibilities. D. An auditor's responsibilities for audited financial statements are not confined to the expression of the auditor's opinion.

Answer (B) is correct. The independent auditor may make suggestions about the form or content of the financial statements or draft them, in whole or in part, based on information from management's accounting system. However, the auditor's responsibility for the financial statements (s)he has audited is confined to the expression of his/her opinion on them.

The objective of assurance services is to ______. A. Provide more timely information. B. Enhance decision making. C. Compare internal information and policies to those of other firms. D. Improve the firm's outcomes.

Answer (B) is correct. The main objective of assurance services, as stated by the AICPA, is to provide information that assists in better decision making. Assurance services encompass audit and other attestation services but also include nonstandard services. Assurance services do not encompass consulting services.

Independent CPAs perform audits on the financial statements of issuers. This type of auditing can best be described as A. An activity whose purpose is to search for fraud. B. A discipline that attests to financial information presented by management. C. A professional activity that measures and communicates financial and business data. D. A regulatory function that prevents the issuance of improper financial information.

Answer (B) is correct. The overall objectives of the auditor include obtaining reasonable assurance about whether the financial statements as a whole are free of material misstatement, whether due to fraud or error. This determination permits an auditor to express an opinion on (attest to) whether the financial statements are presented fairly, in all material respects, in accordance with an applicable financial reporting framework (e.g., U.S. GAAP).

An auditor's report expresses an unmodified opinion and includes an emphasis-of-matter paragraph. The auditor's report is deficient if the emphasis-of-matter paragraph states that the entity A. Is significantly affected by a major catastrophe. B. Has omitted a statement of cash flows. C. Has had an unusually important subsequent event. D. Has significant related party transactions.

Answer (B) is correct. The statement of cash flows is a basic financial statement. Its omission when financial position and results of operations are presented is a material misstatement that requires the auditor to modify the opinion. An emphasis-of-matter paragraph is used when (1) the matter is fundamental to users' understanding of the statements, (2) the auditor considers that drawing users' attention to the matter is necessary, and (3) the matter is appropriately presented and disclosed in the statements.

In gathering evidence in the performance of substantive procedures, the auditor most likely A. Uses the test month approach. B. Relies on persuasive rather than conclusive evidence in the majority of cases. C. Considers the client's documentary evidence less reliable than evidence gathered orally by inquiry of management. D. Expresses an adverse opinion if (s)he has substantial doubt as to any assertion of material significance.

Answer (B) is correct. To be appropriate, audit evidence should be relevant and reliable. Also, because of the inherent limitations of the audit, most audit evidence is persuasive rather than conclusive. However, although the cost of obtaining evidence and its usefulness should be rationally related, the matter of difficulty, time, or cost is not in itself a valid basis for (1) omitting a procedure when no alternative exists or (2) being satisfied with less than persuasive evidence.

An auditor expresses an adverse opinion if A. A severe scope limitation has been imposed by management. B. A misstatement is material and pervasive. C. A qualified opinion cannot be expressed because the auditor lacks independence. D. The company's ability to continue as a going concern is subject to substantial doubt.

Answer (B) is correct. When the effects on the financial statements of a material misstatement are pervasive, the auditor expresses an adverse opinion. Pervasive effects are not confined to specific elements, accounts, or items of the financial statements. If they are confined, they represent a substantial proportion of the statements.

Under which of the following circumstances would a disclaimer of opinion not be appropriate? A. The auditor is engaged after fiscal year-end and is unable to observe physical inventories or apply alternative procedures to verify their balances. B. The auditor is unable to determine the amounts associated with fraud committed by the client's management. C. The financial statements fail to contain adequate disclosure concerning related party transactions. D. The client refuses to permit its attorney to furnish information requested in a letter of audit inquiry.

Answer (C) is correct. A disclaimer is inappropriate when the financial statements contain material departures from the applicable financial reporting framework. Inadequacy of the disclosures required by the applicable financial reporting framework is such a departure. Because U.S. GAAP require certain disclosures about related party transactions, the inadequacy of such disclosures is a basis for expressing a qualified or an adverse opinion.

Which AICPA Conduct Rule applies only to members in the practice of public accounting? A. General Standards (201). B. Accounting Principles (203). C. Independence (101). D. Compliance with Standards (202).

Answer (C) is correct. Conduct Rule 101 states, "A member in public practice shall be independent in the performance of professional services as required by standards promulgated by bodies designated by Council." The scope of services addressed by this rule is broader than the expression of opinions on financial statements. Hence, it applies to such professional services as reviews, reports on prospective financial information, and reports on other attestation engagements.

A note to the financial statements of the First Security Bank indicates that all of the records relating to the bank's business operations are stored on magnetic disks and that no emergency backup systems or duplicate disks are stored because the bank and its auditors consider the occurrence of a catastrophe to be remote. Based upon this note, the auditor's report on the financial statements should express A. A "subject to" opinion. B. A qualified opinion. C. An unmodified opinion. D. An adverse opinion.

Answer (C) is correct. Failure to provide for backup records does not affect the fairness of the financial statements, regardless of the negative implications for the client's internal control. The auditor should therefore express an unmodified opinion in the absence of other indications to the contrary.

A nonissuer 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 material 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. Qualified opinion. B. Emphasis-of-matter paragraph. C. Unmodified opinion. D. Consistency modification.

Answer (C) is correct. If a change in accounting principle has no material effect on the current financial statements but is expected to have a material effect in future years, the change should be disclosed by the client if required by the applicable financial reporting framework. But it need not be recognized in the report.

With respect to consistency of financial statements, which of the following should be done by an auditor who has audited a company's financial statements for the current year but not the preceding year? A. Report on the financial statements of the current year without concern for consistency with the prior year. B. Consider the consistent application of principles within the year under audit but not between the current and preceding year. C. Determine whether the current period's accounting policies are consistently applied regarding opening balances. D. Rely on the report of the prior year's auditors if it does not mention consistency.

Answer (C) is correct. In an initial engagement, the statements for the prior period either (1) were not audited or (2) were audited by a predecessor auditor. An auditor's objective in an initial engagement is to obtain sufficient appropriate evidence about whether (1) opening balances materially misstate the current statements, (2) accounting policies reflected in opening balances are consistently applied in the current statements, and (3) change in accounting policies are appropriately accounted for and disclosed (AU-C 510).

Observation is considered a reliable audit procedure but one that is limited in usefulness. However, it is used in a number of different audit situations. Which of the following statements is true regarding observation as an audit technique? A. It is the most effective audit methodology to use in filling out internal control questionnaires. B. It is the most persuasive methodology to learn how transactions are really processed during the period under audit. C. It is most persuasive about the performance of a process but is limited to the moment in time at which the observation takes place. D. It is the most persuasive audit technique for determining if fraud has occurred.

Answer (C) is correct. Observation consists of looking at a process or procedure being performed by others. It provides audit evidence about the process or procedure but is limited to that moment in time by the fact that the act of being observed may affect how the process or procedure is performed.

In which of the following circumstances would an auditor usually choose between expressing a qualified opinion or disclaiming an opinion? A. Material misstatement. B. Inadequate disclosure of accounting policies. C. Inability to obtain sufficient appropriate audit evidence. D. Unreasonable justification for a change in accounting principle.

Answer (C) is correct. Scope limitations may require a qualification of the opinion or a disclaimer. The choice depends on whether the possible effects of undetected misstatements are material and pervasive.

Competence as an independent auditor includes all of the following except A. Having the technical qualifications to perform an engagement. B. Possessing the ability to supervise assistants. C. Warranting the infallibility of the work performed. D. Consulting others if additional technical information is needed.

Answer (C) is correct. The auditor is not a guarantor. The auditor's responsibility is to express (or disclaim) an opinion on whether the financial statements, taken as a whole, are presented fairly. The audit is planned and performed to provide reasonable, but not absolute, assurance that the financial statements are not materially misstated.

Which of the following procedures is the auditor most likely to perform after accepting an initial audit engagement? A. Prepare a rough draft of the financial statement and of the auditor's report. B. Assess control risk for the assertions embodied in the financial statements. C. Tour the client's facilities. D. Consult with and review the work of the predecessor auditor prior to discussing the engagement with the client management.

Answer (C) is correct. The auditor performs risk assessment procedures to obtain an understanding of the entity and its environment, including internal control. They include (1) inquiries within the entity, (2) analytical procedures, and (3) observation and inspection. An example of observation and inspection is touring the client's facilities.

Which of the following factors most likely would cause an auditor to decline a new audit engagement? A. An inadequate understanding of the entity's internal control. B. The close proximity to the end of the entity's fiscal year. C. Failure of management to satisfy the preconditions for an audit. D. An inability to perform preliminary analytical procedures before assessing control risk.

Answer (C) is correct. The auditor should agree with management or those charged with governance upon the terms of the engagement. The auditor accepts the engagement only if (1) the preconditions for an audit are present and (2) a common understanding of the terms has been reached. The preconditions are (1) use of an acceptable accounting framework and (2) agreement on the premise of the audit. The premise relates to the fundamental responsibilities of management and, if appropriate, those charged with governance.

The auditor's report may be addressed to the company whose financial statements are being audited or to that company's A. Chief operating officer. B. President. C. Board of directors. D. Chief financial officer.

Answer (C) is correct. The auditor's report should be addressed to those for whom the report is prepared. If the client is the auditee, the addressee may be the company whose statements are being audited or to those charged with governance (e.g., the board of directors). If the client is an unincorporated entity, the report should be addressed as circumstances dictate, e.g., to the partners or the proprietor. If the statements audited are not those of the client, the client is the proper addressee (AU-C 700).

The financial statements include a separate statement of changes in equity. This statement should A. Not be identified in the introductory paragraph but should be reported on separately in the opinion paragraph. B. Be excluded from both the introductory and opinion paragraphs. C. Be identified in the introductory paragraph of the report but need not be reported on separately in the opinion paragraph. D. Be identified in the introductory paragraph of the report and must be reported on separately in the opinion paragraph.

Answer (C) is correct. The balance sheet, statement of income, statement of changes in equity, and statement of cash flows are the financial statements upon which the auditor customarily reports. The introductory paragraph identifies the titles of the entity's financial statements. However, the statement of changes in equity and a separate statement of comprehensive income are not separately reported on the opinion paragraph. The reason is that changes in equity and comprehensive income are included in financial position, results of operations, and cash flows.

Which of the following best describes why an independent auditor is asked to express an opinion on the fair presentation of financial statements? A. It is difficult to prepare financial statements that fairly present a company's financial position, results of operations, and cash flows without the expertise of an independent auditor. B. It is management's responsibility to seek available independent aid in the appraisal of the financial information shown in its financial statements. C. The opinion of an independent party is needed because a company may not be objective with respect to its own financial statements. D. It is a customary courtesy that all shareholders of a company receive an independent report on management's stewardship in managing the affairs of the business.

Answer (C) is correct. The opinion of a suitably qualified, independent, outside party lends credibility to the financial statements and provides some protection to third parties who may rely upon them when making investment decisions. The opinion contained in the audit report, which accompanies audited financial statements, is the result of the auditor's performance of the attest function, that is, the gathering of evidence during the audit and the issuance of an opinion on the fairness of the presentation of the statements.

On February 13, Year 2, Fox, CPA, met with the audit committee of the Gem Corporation to review the draft of Fox's report on the company's financial statements as of and for the year ended December 31, Year 1. On February 16, Year 2, Fox completed all remaining field work and obtained sufficient appropriate evidence to support the opinion on the financial statements. On February 28, Year 2, the final report was mailed to Gem's audit committee. What date most likely would be used on Fox's report? A. December 31, Year 1. B. February 13, Year 2. C. February 16, Year 2. D. February 28, Year 2.

Answer (C) is correct. The report should be dated no earlier than the date on which the auditor has obtained sufficient appropriate audit evidence. February 16, Year 2, is the date that Fox obtained sufficient appropriate evidence to support the opinion on the financial statements. The auditor is not responsible for making any inquiries or carrying out any audit procedures for the period after the date of the report (but see AU-C 925).

A large university has relatively ineffective internal control. The university's auditor seeks assurance that all tuition revenue has been recorded. The auditor could best obtain the desired assurance by A. Confirming a sample of tuition payments with the students. B. Observing tuition payment procedures on a surprise basis. C. Comparing business office revenue records with registrar's office records of students enrolled. D. Preparing a year-end bank reconciliation.

Answer (C) is correct. To be assured that all tuition revenue is being recorded, the auditor must perform substantive procedures, which are tests of details and substantive analytical procedures to detect material misstatements in an account balance, transaction class, or disclosure component. Comparing business office revenue records with registrar's office records of students enrolled provides analytical evidence based on independently generated records.

Which of the following factors does a CPA ordinarily consider in the planning stage of an audit engagement? I. Financial statement accounts likely to contain a misstatement. II. Conditions that require extension of audit tests. A. I only. B. II only. C. Both I and II. D. Neither I nor II.

Answer (C) is correct. When planning an audit, the auditor should consider, among other things, the financial statement accounts likely to require adjustment and the conditions that require extension or modification of audit procedures (e.g., risk of material misstatement).

When the auditor cannot obtain sufficient appropriate evidence to determine whether certain client acts are not in compliance with laws and regulations, (s)he would most likely express A. An unmodified opinion with an emphasis-of-matter paragraph. B. Either a qualified opinion or an adverse opinion. C. Either a disclaimer of opinion or a qualified opinion. D. Either an adverse opinion or a disclaimer of opinion.

Answer (C) is correct. When the auditor cannot obtain sufficient appropriate evidence, (s)he expresses a qualified opinion if the possible effects are material but not pervasive. If the possible effects are material and pervasive, (s)he disclaims an opinion.

During the initial planning phase of an audit, a CPA most likely would A. Identify specific internal control activities that are likely to prevent fraud. B. Evaluate the reasonableness of the client's accounting estimates. C. Discuss the timing of the audit procedures with the client's management. D. Inquire of the client's attorney as to whether any unrecorded claims are probable of assertion.

Answer (C) is correct. The first step in the audit process is the auditor's decision whether to accept a client. After having decided to perform an audit, the auditor enters the initial planning phase. During initial planning, an auditor should, among other things, meet with the client to agree on the type, scope, and timing of certain aspects of the engagement (e.g., observation of inventory).

An auditor's analytical procedures used to form an overall conclusion indicated that the client's accounts receivable had doubled since the end of the prior year. However, the allowance for doubtful accounts as a percentage of accounts receivable remained about the same. Which of the following client explanations most likely would satisfy the auditor? A. The client liberalized its credit standards in the current year and sold much more merchandise to customers with poor credit ratings. B. Twice as many accounts receivable were written off in the prior year as in the current year. C. A greater percentage of accounts receivable were currently listed in the "more than 90 days overdue" category than in the prior year. D. The client opened a second retail outlet in the current year and its credit sales approximately equaled the older, established outlet.

Answer (D) is correct. A basic premise of analytical procedures is that plausible relationships among data may reasonably be expected to exist and continue in the absence of known conditions to the contrary. The only reasonable explanation proposed by the client to satisfy the auditor is the opening of a second retail outlet with sales approximating the established outlet. It is plausible that a doubling of capacity while selling to similarly creditworthy customers might have resulted in a doubling of receivables without a change in the proportion of doubtful accounts.

A basic premise underlying analytical procedures is that A. These procedures cannot replace tests of balances and transactions. B. Statistical tests of financial information may lead to the discovery of material misstatements in the financial statements. C. The study of financial ratios is an acceptable alternative to the investigation of unusual fluctuations. D. Plausible relationships among data may reasonably be expected to exist and continue in the absence of known conditions to the contrary.

Answer (D) is correct. A basic premise underlying the application of analytical procedures is that plausible relationships among data may reasonably be expected to exist and continue in the absence of known conditions to the contrary. Variability in these relationships can be explained by, for example, unusual events or transactions, business or accounting changes, misstatements, or random fluctuations.

When financial statements of a prior period are presented on a comparative basis with financial statements of the current period, the continuing auditor is responsible for A. Expressing dual-dated opinions. B. Updating the report on the previous financial statements only if there has not been a change in the opinion. C. Updating the report on the previous financial statements only if the previous opinion was qualified and the reasons for the qualification no longer exist. D. Updating the report on the previous financial statements regardless of the opinion previously expressed.

Answer (D) is correct. A continuing auditor should update the report on the individual statements of one or more prior periods presented on a comparative basis. An updated report considers information of which the continuing auditor is aware as a result of the current audit. Furthermore, the updated report is issued in conjunction with the report on the current statements. For example, if the opinion was modified because of a material misstatement, and management revises the statements, the updated report expresses an unmodified opinion.

Eagle Company's financial statements contain a departure from generally accepted accounting principles because, due to unusual circumstances, the statements would otherwise be misleading. The auditor should express an opinion that is A. Qualified and describe the departure in a separate paragraph. B. Unmodified but not mention the departure in the auditor's report. C. Qualified or adverse, depending on materiality, and describe the departure in an other-matter paragraph. D. Unmodified and describe the departure in an other-matter paragraph.

Answer (D) is correct. A material departure from GAAP prohibits expression of an opinion that financial statements are in conformity with GAAP. However, an exception is permitted when the auditor can demonstrate that because of unusual circumstances the statements would otherwise have been misleading. Given these circumstances, and if no other basis for modifying the opinion exists, the auditor may express an unmodified opinion, provided that (s)he describes in an other-matter paragraph of the report the departure, its effects, and the reasons compliance with GAAP would have been misleading.

An auditor includes an emphasis-of-matter paragraph in an otherwise unmodified report when the entity being reported on had significant transactions with related parties. The inclusion of this paragraph A. Is considered a qualification of the opinion. B. Violates auditing standards if this information is already disclosed in notes 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.

Answer (D) is correct. An auditor may emphasize a matter in a separate paragraph and express an unmodified opinion. Matters to be emphasized might include that the entity has had significant related party transactions. Subsequent events and accounting matters affecting comparability (e.g., a change in the reporting entity) are other matters suitable for this treatment.

An auditor may not express a qualified opinion when A. A scope limitation prevents the auditor from completing an important audit procedure. B. The auditor's report refers to the work of a specialist. C. An accounting principle at variance with the applicable financial reporting framework is used. D. The auditor lacks independence with respect to the audited entity.

Answer (D) is correct. An auditor must be independent of the entity when performing an audit in accordance with GAAS unless (1) GAAS provide otherwise or (2) a law or regulation requires the auditor to report on the statements (AU-C 200).

An other-matter paragraph is included in the auditor's report except when A. The opinion on the prior-period statements has changed. B. Required supplementary information is presented. C. A predecessor auditor's report is not reissued. D. The client has materially restated the prior year's comparative financial statements.

Answer (D) is correct. An other-matter paragraph draws attention to a matter not required to be presented or disclosed in the financial statements that is relevant to users' understanding of the auditor's audit, responsibilities, or report. A correction of a material misstatement in previously issued financial statements requires the auditor to include an emphasis-of-matter paragraph. This matter is appropriately presented or disclosed in the financial statements and is fundamental to users' understanding.

The appropriateness of evidence available to an auditor is least likely to be affected by the A. Relevance of such evidence to the financial statement assertion being investigated. B. Relationship of the preparer of such evidence to the entity being audited. C. Timeliness of such audit evidence. D. Sampling method employed by the auditor to obtain a sample of such evidence.

Answer (D) is correct. Appropriate audit evidence is relevant and reliable. Evidence is usually more reliable when it (1) is obtained from independent sources; (2) is generated internally under effective internal control; (3) is obtained directly by the auditor; (4) is in documentary form, whether paper, electronic, or other medium; and (5) consists of original documents. The sample selection method does not affect the appropriateness of evidence as long as the sample is representative of the population.

Which of the following statements about evidence is true? A. Appropriate evidence supporting management's assertions should be conclusive rather than merely persuasive. B. Effective internal control contributes little to the reliability of the evidence created within the entity. C. The cost of obtaining evidence is not an important consideration to an auditor in deciding what evidence should be obtained. D. A client's accounting records cannot be considered sufficient appropriate audit evidence on which to base the auditor's opinion.

Answer (D) is correct. Audit evidence consists of accounting records (initial entries and supporting records, such as ledgers, worksheets, and spreadsheets) and other information (minutes of meetings, confirmations, information obtained by inquiry, etc.). But accounting records alone do not provide sufficient appropriate evidence as a basis for an opinion on the financial statements.

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 A. Securities and Exchange Commission. B. Former client's attorney. C. Former client's board of directors. D. Successor auditor.

Answer (D) is correct. Before reissuing the report, the predecessor auditor should consider whether the report is still appropriate. The predecessor auditor should (1) read the current period financial statements, (2) compare the prior period statements reported on with those to be presented comparatively, and (3) obtain written representations from the successor auditor and management (AU-C 560).

An auditor concludes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. If the entity's disclosures concerning this matter are adequate and no other issues prevail, the audit report may include a Disclaimer of Opinion | Qualified Opinion A. Yes, Yes B. No, No C. No, Yes D. Yes, No

Answer (D) is correct. By itself, a substantial doubt about an entity's ability to continue as a going concern does not require a modification of the opinion paragraph. Hence, a qualified opinion would be inappropriate. However, nothing precludes the auditor from disclaiming an opinion in these circumstances.

The most reliable forms of documentary evidence are those documents that are A. Prenumbered. B. Internally generated. C. Easily duplicated. D. Authorized by a responsible official.

Answer (D) is correct. Documents generated externally by independent sources are more reliable than those produced by the auditee. However, the reliability of internal evidence is enhanced if it is subject to effective control. Accordingly, authorization by an appropriate party lends credibility to a document because it increases the probability that the underlying transaction is valid.

The auditor's opinion refers to U.S. generally accepted accounting principles (U.S. GAAP). Which of the following best describes U.S. GAAP? A. The interpretations of accounting rules and procedures by certified public accountants on audit engagements. B. The pronouncements of the Financial Accounting Standards Board. C. The guidelines set forth by various governmental agencies that derive their authority from Congress. D. Principles issued by bodies designated by the Council of the AICPA.

Answer (D) is correct. GAAP are issued by bodies designated by the AICPA Council in accordance with Rules of Conduct 202 and 203. For nongovernmental financial accounting purposes, these standards setters include the FASB for U.S. GAAP and the International Accounting Standards Board (IASB) for international financial reporting standards. Moreover, pronouncements of the SEC must be followed by registrants.

Management believes, and the auditor is satisfied, that a material loss probably will occur when pending litigation is resolved. Management is unable to make a reasonable estimate of the amount or range of the potential loss but fully discloses the situation in the notes to the financial statements. If management does not make an accrual in the financial statements, the auditor should express a(n) A. Qualified opinion due to a scope limitation. B. Qualified opinion due to a material misstatement. C. Unmodified opinion with an emphasis-of-matter paragraph. D. Unmodified opinion with no additional paragraph in the auditor's report.

Answer (D) is correct. If the auditor concludes that sufficient appropriate evidence supports management's assertions about the nature of a matter involving an uncertainty, an unmodified report is ordinarily appropriate.

If the objective of a test of details is to detect overstatements of sales, the auditor should compare transactions in the A. Cash receipts journal with the sales journal. B. Sales journal with the cash receipts journal. C. Source documents with the accounting records. D. Accounting records with the source documents.

Answer (D) is correct. Overstatements of sales likely result from entries with no supporting documentation. The proper direction of testing is to sample entries in the sales account and vouch them to the shipping documents. The source documents represent the valid sales.

The auditor's judgment concerning the overall fairness of the presentation of financial position, results of operations, and cash flows is applied within the framework of A. Quality control. B. Generally accepted auditing standards, which include the concept of materiality. C. The auditor's assessment of the risk of material misstatement. D. Generally accepted accounting principles.

Answer (D) is correct. Reporting standards require the auditor to state whether the audited entity's financial statements are presented in conformity with GAAP. Without an applicable reporting framework, the auditor would have no uniform standard for judging fairness of presentation....

The Sarbanes-Oxley Act limits the nonaudit services that an audit firm can provide to issuer audit clients. Which of the following services is still an allowable service that an auditor may provide to an issuer client? A. Internal audit and other specified services. B. Legal services. C. Management consulting services. D. Tax compliance services.

Answer (D) is correct. The Sarbanes-Oxley Act prohibits audit firms from providing consulting, legal, internal auditing, and other specified services to issuer audit clients. Moreover, any other service may be prohibited by the PCAOB. Audit firms may provide other nonaudit services, such as conventional tax planning and compliance services, to issuer audit clients. However, the audit committee must preapprove these other nonaudit services to be provided by the auditor.

When Congress passed the Sarbanes-Oxley Act of 2002, it imposed greater regulation on public companies and their auditors and required increased accountability. Which of the following is not a provision of the act? A. Executives must certify the appropriateness of the financial statements. B. The act provides criminal penalties for fraud. C. Auditors may not provide specific nonaudit services for their audit clients. D. Audit firms must be rotated on a periodic basis.

Answer (D) is correct. The act requires rotation of the lead audit or coordinating partner and the reviewing partner on audits of public clients every 5 years. However, the act does not require the rotation of audit firms.

Audit plans should be designed so that A. Most of the required procedures can be performed as interim work. B. The risks of material misstatement are assessed at a sufficiently low level. C. The auditor can make constructive suggestions to management. D. The audit evidence gathered supports the auditor's conclusions.

Answer (D) is correct. The auditor is responsible for collecting sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the opinion. Audit plans describe the steps involved in that process. Thus, the evidence should support the auditor's conclusions.

Which of the following statements best describes the distinction between the auditor's responsibilities and management's responsibilities? A. Management has responsibility for maintaining and adopting sound accounting policies, and the auditor has responsibility for internal control. B. Management has responsibility for the basic data underlying financial statements, and the auditor has responsibility for drafting the financial statements. C. The auditor's responsibility is confined to the audited portion of the financial statements, and management's responsibility is confined to the unaudited portions. D. The auditor's responsibility is confined to expressing an opinion, but the financial statements remain the responsibility of management.

Answer (D) is correct. The auditor is responsible for the opinion on financial statements, but management is responsible for the representations made in the financial statements.

An auditor expresses a qualified opinion because of a material misstatement related to specific amounts in the financial statements. Which of the following phrases should be included in the opinion paragraph? "When read in conjunction with Note X" | "With the Foregoing Explanation" A. Yes, No B. No,Yes C. Yes, Yes D. No, No

Answer (D) is correct. The auditor should use the phrase "except for" to qualify an opinion, followed by the basis for the qualification and a reference to the basis for qualified opinion paragraph preceding the opinion paragraph. Given a qualification because of a material misstatement related to specific amounts in the financial statements, the basis paragraph should describe the matter resulting in the qualification. It also should include (1) a description and quantification of the financial effects, if practicable; (2) an explanation of how narrative disclosures are misstated; or (3) omitted information, if practicable, and a description of its nature. However, if financial-effects disclosures are made in a note to the statements, the basis paragraph may refer to it. Furthermore, the notes are part of the financial statements, and a phrase such as "when read in conjunction with Note X" in the opinion paragraph is likely to be misunderstood. Also, wording such as "with the foregoing explanation" is neither clear nor forceful enough.

An auditor most likely would review an entity's periodic accounting for the numerical sequence of shipping documents and invoices to support management's financial statement assertion of A. Occurrence. B. Rights and obligations. C. Valuation and allocation. D. Completeness.

Answer (D) is correct. The completeness assertion concerns whether all transactions (or assets, liabilities, and equity interests) that should be recorded are recorded. Testing the numerical sequence of shipping documents and invoices is a means of detecting omitted items.

The securities of Ralph Corporation are listed on a regional stock exchange and registered with the Securities and Exchange Commission (SEC). The management of Ralph engages a CPA to perform an independent audit of Ralph's financial statements. The primary objective of this audit is to provide assurance to the A. Regional stock exchange. B. Board of directors of Ralph Corporation. C. SEC. D. Investors in Ralph securities.

Answer (D) is correct. The opinion of a suitably qualified, independent, outside party lends credibility to the financial statements and provides some protection to third parties who may rely upon them when making investment decisions. Some users have the authority to obtain any information desired, but most investors do not....

The primary reason for an audit by an independent, external audit firm is to A. Satisfy governmental regulatory requirements. B. Guarantee that there are no misstatements in the financial statements and ensure that any fraud will be discovered. C. Relieve management of responsibility for the financial statements. D. Provide increased assurance to users as to the fairness of the financial statements.

Answer (D) is correct. The overall objectives of the auditor include obtaining reasonable assurance about whether the financial statements as a whole are free of material misstatement, whether due to fraud or error. This determination permits an auditor to express an opinion on (attest to) whether the financial statements are presented fairly, in all material respects, in accordance with an applicable financial reporting framework (e.g., U.S. GAAP). An audit performed by an independent, external audit firm provides assurance of the objectivity of the auditor's opinion.

An auditor may reasonably express a "subject to" qualified opinion for Departure from an Applicable Financial Reporting Framework | Lack of Consistency A. Yes, Yes B. Yes,No C. No ,Yes D. No ,No

Answer (D) is correct. The phrase "subject to" should not be used in any report. It is not clear or forceful enough (AU-C 705).

Which of the following procedures would provide the most reliable audit evidence? A. Inquiries of the client's internal audit staff held in private. B. Inspection of prenumbered client purchase orders filed in the vouchers payable department. C. Analytical procedures performed by the auditor on the entity's trial balance. D. Inspection of bank statements obtained directly from the client's financial institution.

Answer (D) is correct. When documentation is prepared solely by client personnel, its reliability is less than that prepared by the auditor or an independent party. Ordinarily, the most reliable documentation is created outside the entity and has never been within the client's control, e.g., statements obtained from the bank, letters from attorneys, and letters from insurance brokers.

A CPA engaged to audit financial statements observes that the accounting for a certain material but not pervasive item is not in conformity with the applicable financial reporting framework, although the matter is prominently disclosed in a note to the financial statements. The CPA should A. Express an unmodified opinion but insert an emphasis-of-matter paragraph with a reference to the note. B. Disclaim an opinion. C. Not allow the accounting treatment for this item to affect the type of opinion because the misstatement was disclosed. D. Qualify the opinion because of the misstatement.

Answer (D) is correct. When financial statements are materially misstated, but the effects are not pervasive, the auditor should express a qualified opinion if the audit has been in accordance with GAAS. The basis for the opinion should be stated in the report even if full and prominent note disclosure has been made.