AUDIT CHAPTER 18

A basic assumption that underlies financial reporting is that an entity will continue as a going concern. Answer: TRUE

T

A correction of a material misstatement in previously issued financial statements is an example of an accounting change that affects comparability and requires an explanatory paragraph in the audit report. Answer: TRUE

T

A going concern issue requires an explanatory paragraph to be added to the standard unqualified audit report (public company). Answer: TRUE

T

A scope limitation results from an inability to obtain sufficient appropriate evidence about some component of the financial statements. Answer: TRUE

T

An auditor must disclaim an opinion when the auditor lacks independence. Answer: TRUE

T

Changes that affect comparability but that do not involve a change in accounting principle or the correction of a misstatement are normally disclosed in the footnotes but do not require an explanatory paragraph in the audit report. Answer: TRUE

T

The choice of which audit report to issue depends on the nature and the materiality of the condition giving rise to the departure. Answer: TRUE

T

Abbot, CPA, as principal auditor for consolidated financial statements, is using a qualified report of another auditor. Abbot does not consider the qualification material relative to the consolidated financial statements and Abbot is willing to accept responsibility for the work of the other auditor. What recognition, if any, must Abbot make in his report to the report of the other audit? A) He need make no reference. B) He must refer to the qualification of the other auditor and qualify his report likewise. C) He must include the other auditor's report with his report but need not qualify his report. D) He must include the other auditor's report with his report and give an explanation of its significance. Answer: A

A

An auditor may reasonably issue an "except for" qualified opinion for: A) a scope limitation or an unjustified accounting change. B) a scope limitation, but not an unjustified accounting change. C) an unjustified accounting change, but not a scope limitation. D) neither an unjustified accounting change nor a scope limitation. Answer: A

A

If the principal auditor decides to make reference to the other auditor's audit, the opinion section must specifically indicate the: A) portion of the financial statements examined by the other auditor. B) name of the other auditor. C) name of the consolidated subsidiary examined by the other auditor. D) type of opinion expressed by the other auditor. Answer:A

A

In the first audit of an entity, because of the entity's record retention policies, 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. 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 because of an uncertainty. Answer: A

A

The predecessor auditor, after properly communicating with the successor auditor, has reissued a report because the entity desires comparative financial statements. The predecessor auditor's report should make: A) no reference to the report or the work of the successor auditor. B) reference to the work of the successor auditor in the scope paragraph. C) reference to both the work and the report of the successor auditor in the opinion paragraph. D) reference to the report of the successor auditor in the scope paragraph. Answer: A

A

When an auditor reports on financial statements prepared according to a special purpose framework, the auditor's report should: A) have an explanatory paragraph added after the opinion paragraph to describe the framework. B) disclaim an opinion on whether the statements were examined in accordance with generally accepted auditing standards. C) not express an opinion on whether the statements are presented in conformity with the basis of accounting used. D) include an explanation of how the results of operations differ from the cash receipts and disbursements basis of accounting. Answer: A

A

When are an auditor's reporting responsibilities not met by attaching an explanation of the circumstances and a disclaimer of opinion to the entity's financial statement? A) When the independent auditor with sufficient appropriate evidence believes the financial statements are not prepared in accordance with GAAP. B) When the auditor was unable to observe the taking of the physical inventory. C) When the auditor is not independent. D) When the auditor has performed insufficient auditing procedures to express an opinion. Answer: A

A

When expressing an opinion on a specified account or item in the financial statements, the auditor need only consider that account or item. However, the auditor must have audited the entire set of financial statements if this engagement requires a report on the entity's: A) net income. B) retained earnings. C) assets. D) working capital. Answer: A

A

When the audited financial statements of the prior year are presented together with those of the current year, the continuing auditor's report should cover: A) both years. B) only the current year. C) only the current year, but the prior year's report should be presented. D) only the current year, but the prior year's report should be referred to. Answer: A

A

When there has been a change in accounting principle that materially affects the comparability of the comparative financial statements presented for a public company and the auditor concurs with the change, the auditor should: Concur Explicitly In the Change Issue an "Except for" Qualified Opinion Refer to the Change in an Explanatory Paragraph A. No No Yes B. Yes No Yes C. Yes Yes No D. No Yes No A) Option A. B) Option B. C) Option C. D) Option D. Answer: A

A

Which of the following parties is responsible for the fairness of the representations made in financial statements? A) Entity's management. B) Independent auditor. C) Audit committee. D) AICPA. Answer: A

A

Which of the following would be considered a change that does not affect comparability? A) Change in accounting estimate. B) Change in accounting principle. C) Correction of principle material misstatement in previously issued financial statements. D) None of these are considered changes that do not affect comparability. Answer: A

A

A special report related to compliance with contractual provisions provides: A) positive assurance. B) negative assurance. C) no assurance. D) none of these. Answer: B

B

If a public company issues financial statements that purport to present its financial position and results of operations but omits the statement of cash flows, the auditor ordinarily will express a(n): A) disclaimer of opinion. B) qualified opinion. C) review report. D) unqualified opinion with a separate explanatory paragraph. Answer: B

B

In connection with the examination of the consolidated financial statements of Mott Industries, Frazier, CPA, plans to refer to another CPA's examination of the financial statements of a subsidiary company. Under these circumstances, Frazier's report must disclose: A) the name of the other CPA and the type of report issued by the other CPA. B) the portion of the financial statements examined by the other CPA. C) the nature of Frazier's review of the other CPA's work. D) in a footnote the portions of the financial statements that were covered by the examinations of both auditors. Answer: B

B

In which of the following situations would an auditor ordinarily choose between expressing an "except for" qualified opinion and expressing 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's opinion is based in part on the report of another auditor. 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

B

Other bases of accounting (special purpose frameworks) include all of the following except: A) tax basis. B) non-GAAP methods used for internal reporting. C) cash basis. D) regulatory basis. Answer: B

B

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 statement that the financial statements do not present fairly. C) the substantive reasons for the financial statements being misleading. D) a description of the uncertainty or scope limitation that prevents an unqualified opinion. Answer: B

B

When the auditor is unable to determine the amounts associated with the illegal acts of entity personnel because of an inability to obtain adequate evidence, the auditor should issue a(n): A) "subject to" qualified opinion. B) disclaimer of opinion. C) adverse opinion. D) unqualified opinion with a separate explanatory/emphasis-of-matter paragraph. Answer: B

B

When the entity fails to include information that is necessary for the fair presentation of financial statements in the body of the statements or in the related footnotes, it is the responsibility of the auditor to present the nature and impact of the faulty accounting or misstatement in the auditor's report and express a(n): A) qualified opinion or a disclaimer of opinion. B) qualified opinion or an adverse opinion. C) adverse opinion or a disclaimer of opinion. D) qualified opinion or an unqualified opinion. Answer: B

B

Which of the following situations will not result in modification of the auditor's report because of a scope limitation? A) Restriction imposed by the client. B) Reliance placed on the report of another auditor. C) Inability to obtain sufficient appropriate evidential matter. D) Restriction caused by the circumstance of the engagement. Answer: B

B

Which of the following would be considered a change that affects comparability and requires an explanatory paragraph? A) Change in accounting estimate. B) Change in accounting principle. C) Change in classification from one acceptable classification to another. D) All of the other options are correct. Answer: B

B

) When audited financial statements are presented in a document containing other information, the auditor: A) has an obligation to perform auditing procedures to corroborate the other information. B) is required to issue an "except for" qualified opinion if the other information has a material misstatement of fact. C) should read the other information to consider whether it is inconsistent with the audited financial statements. D) has no responsibility for the other information because it is not part of the basic financial statements. Answer: C

C

A CPA who is not independent and is associated with financial statements should disclaim an opinion with respect to those financial statements. The disclaimer should: A) clearly state the specific reasons for lack of independence. B) not mention any reason for the disclaimer other than that the CPA was unable to conduct the examination in accordance with generally accepted auditing standards. C) not describe the reason for lack of independence but should state specifically that the CPA is not independent. D) include a middle paragraph clearly describing the CPA's association with the entity and explaining why the CPA was unable to gather sufficient appropriate evidential matter to warrant the expression of an opinion. Answer: C

C

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 explanatory/emphasis-of-matter paragraph that specifically uses the phrase(s): A) "reasonable period of time, not to exceed one year" and "going concern." B) "reasonable period of time, not to exceed one year" but not "going concern." C) "going concern" but not "reasonable period of time, not to exceed one year." D) neither "going concern" nor "reasonable period of time, not to exceed one year." Answer: C

C

An engagement to express an opinion on a system of internal control will generally: A) only require those procedures 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. Answer: C

C

Cravens was asked to perform the first audit of a wholesale business that does not maintain perpetual inventory records. Cravens has observed the current inventory but has not observed the physical inventory at the previous year-end date and concludes that the opening inventory balance, which is not auditable, is a material factor in the determination of cost of goods sold for the current year. Cravens will probably: A) decline the engagement. B) express an unqualified opinion on the balance sheet and income statement except for inventory. C) issue a disclaimer of opinion. D) issue an adverse opinion. Answer: C

C

For which of the following events would an auditor issue a report that does not include any reference to comparability? 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 service life used to calculate depreciation expense. D) A correction of a material misstatement in previously issued financial statements. Answer: C

C

If the auditor believes that there is minimal likelihood that resolution of an uncertainty will have a material effect on the financial statements, the auditor would issue a(n): A) "except for" opinion. B) adverse opinion. C) unqualified opinion. D) disclaimer of opinion. Answer: C

C

In an engagement to express an opinion on one or more specified elements, accounts, or items of a financial statement, the auditor can generally audit only those specified elements and not the entire set of financial statements. However, the auditor is required to audit the entire set of financial statements if the elements specified include: A) net income. B) stockholders' equity. C) net income and stockholders' equity. D) assets. Answer: C

C

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 the auditor wishes to call attention to the matter and management does not make an accrual in the financial statements, the auditor should issue a(n): A) qualified report due to a scope limitation. B) qualified report due to a departure from GAAP. C) unqualified report with an explanatory paragraph. D) standard unmodified auditor's report. Answer: C

C

What is an auditor's responsibility for supplementary information, such as segment information, that is outside the basic financial statements, but required by the FASB? 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 assist in preparing the supplementary information. C) The auditor is required to read the other information and consider whether such information is consistent with the information in the financial statements. 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. Answer: C

C

When comparative financial statements are presented, the auditor's report should be considered to apply to the financial statements of the: A) periods presented plus the one preceding period. B) current period only. C) current period and those of the other periods presented. D) current and immediately preceding period only. Answer: C

C

Comparative financial statements include the financial statements of a prior period that were examined by a predecessor auditor whose report is not presented. If the predecessor auditor's report was qualified, the successor auditor must: A) obtain written approval from the predecessor auditor to include the prior year's financial statements. B) issue a standard comparative audit report indicating the division of responsibility. C) express an opinion on the current year statements alone and make no reference to the prior year statements. D) disclose the nature of and reasons for any qualification in the predecessor auditor's opinion. Answer: D

D

A predecessor auditor should complete the following before reissuing a report on statements presented on a comparative basis: A) read the financial statements of the current period. B) read the financial statements of the past five years. C) obtain a letter of representations from the current-year, successor auditor. D) read the financial statements of the current period and obtain a letter of representation from the management of the entity and from the current-year, successor auditor. Answer: D

D

A scope limitation sufficient to preclude an unqualified 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 provide a representation letter acknowledging its responsibility for the fair presentation of the financial statements in conformity with GAAP. Answer: D

D

All of the following are true with respect to the auditor's consideration of information other than the audited financial statements that are included in an entity's annual report except: A) the auditor is under no obligation to perform audit procedures on this other information. B) the auditor must consider whether the other information is consistent with the information contained in the audited financial statements. C) the auditor must request that material inconsistencies be corrected. D) the auditor must perform audit procedures on this other information. Answer: D

D

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 entity refuses to revise or eliminate the material inconsistency, the auditor may: A) issue an "except for" qualified opinion after discussing the matter with the entity's board of directors. B) consider the matter closed since the other information is not in the audited financial statements. C) disclaim an opinion on the financial statements after explaining the material inconsistency in a separate explanatory/emphasis-of-matter paragraph. D) revise the auditor's report to include a separate explanatory (or other matter) paragraph describing the material inconsistency. Answer: D

D

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 unqualified opinion. Answer: D

D

An auditor was unable to obtain audited financial statements or other evidence supporting an entity's material investment in a large foreign subsidiary. Between which of the following reports should the auditor choose? A) Adverse and unqualified with an explanatory/emphasis-of-matter paragraph added. B) Disclaimer and unqualified with an explanatory/emphasis-of-matter paragraph added. C) Qualified and adverse. D) Qualified and disclaimer. Answer: D

D

An auditor would issue an adverse opinion if: A) the audit was begun by other independent auditors who withdrew from the engagement. B) a qualified opinion cannot be given because the auditor lacks independence. C) a restriction on the scope of the audit was significant. D) the statements taken as a whole do not fairly present the financial condition and results of operations of the company. Answer:D

D

Auditing standards define special purpose financial statements as including those prepared under the following basis(es): A) regulatory basis. B) tax basis. C) contractual basis. D) regulatory basis, tax basis, and contractual basis. Answer: D

D

In the auditor's report, the principal auditor decides not to make reference to another CPA who audited an entity's subsidiary. The principal auditor could justify this decision if, among other requirements, the principal auditor: A) issues an unqualified opinion on the consolidated financial statements. B) learns that the other CPA issued an unqualified opinion on the subsidiary's financial statements. C) is unable to review the other CPA's audit programs and working papers. D) is satisfied as to the other CPA's independence and professional reputation. Answer: D

D

The auditor's best course of action with respect to "other financial information" included in an annual report containing the auditor's report is to: A) indicate in the auditor's report that the "other financial information" is unaudited. B) consider whether the "other financial information" is accurate by performing a limited review. C) obtain written representations from management as to the material accuracy of the "other financial information." D) read and consider the manner of presentation of the "other financial information." Answer: D

D

When an auditor concludes there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time, the auditor's responsibility is to: A) prepare prospective financial information to verify whether management's plans can be effectively implemented. B) project future conditions and events for a period of time not to exceed one year following the date of the financial statements. C) issue a qualified or adverse opinion, depending upon materiality, because of the possible effects on the financial statements. D) consider the adequacy of disclosure about the entity's possible inability to continue as a going concern. Answer: D

D

When reporting on comparative financial statements where the financial statements of the prior year have been examined by a predecessor auditor whose report is not presented, the successor auditor should make: A) no reference to the predecessor auditor. B) reference to the predecessor auditor only if the predecessor auditor expressed a qualified opinion. C) reference to the predecessor auditor only if the predecessor auditor expressed an unqualified opinion. D) reference to the predecessor auditor in an explanatory paragraph regardless of the type of opinion expressed by the predecessor auditor. Answer: D

D

Which of the following would not require an explanatory/emphasis-of-matter paragraph in the auditor's report? A) Required supplementary information is omitted or departs materially from the requirement of the applicable financial reporting framework. B) Lack of comparability in the financial statements due to accounting changes. C) Going concern. D) Opinion based in part on the report of another auditor. Answer: D

D

A change in accounting estimate is an example of an accounting change that affects comparability and requires an explanatory paragraph in the audit report. Answer: FALSE

F

An auditor may be unable to express an unqualified opinion if an immaterial departure from GAAP is present in the financial statements. Answer: FALSE

F

An opinion based in part on the report of another auditor requires an explanatory/emphasis-of-matter paragraph be added to the standard unqualified audit report. Answer: FALSE

F