Audit Test 1 Homework
For which of the following events would an auditor issue a report that omits any reference to a change in accounting principle or correction of a material misstatement?
A change in the useful life used to calculate the provision for depreciation expense.
An auditor's independence is most likely considered impaired if the auditor has
A joint, closely held business investment with the client that is material to the auditor's net worth.
Seripak Corporation, a nonissuer, made a material change in accounting principle with which the auditor concurs. The auditor should express
An unmodified opinion with an emphasis-of-matter paragraph
How should differences of opinion between the engagement partner and the quality control reviewer be resolved?
By following the firm's policies and procedures.
According to the standards of the profession, which of the following circumstances will prevent a CPA performing audit engagements from being independent?
Employment of the CPA's spouse as a client's director of internal audit. According to the Code of Professional Conduct, a spouse may be employed by a client if she does not exert significant influence over the client's financial statements
An auditor strives to achieve independence in appearance to
Maintain public confidence in the profession
In a financial statement audit of a nonissuer, an auditor would express an unmodified opinion with an emphasis-of-matter paragraph added to the auditor's report for
No (An unjustified change in an accounting principle) No (A Weakness in Internal Control)
In which of the following circumstances would a CPA who audits XM Corporation lack independence?
The CPA and XM's president each own 25% of FOB Corporation, a closely held company.
An accounting firm's independence is most likely to be impaired when
The firm and the client have a material cooperative arrangement.
A change in accounting principle made by a nonissuer has no material effect on the financial statements in the current year but is expected to have a material effect in later years. Accordingly, the change should be
Disclosed in the notes to the financial statements of the current year.
In connection with the element of monitoring, a CPA firm's system of quality control ordinarily should provide for the maintenance of
Documentation to demonstrate compliance with its policies and procedures
On January 2, Year 2, the Retail Auto Parts Co. received a notice from its primary suppliers that effective immediately all wholesale prices would be increased 10%. On the basis of the notice, Retail Auto Parts Co. revalued its December 31, Year 1, inventory to reflect the higher costs. The inventory constituted a material proportion of total assets. However, the effect of the revaluation was material to current assets but not to total assets or net income. In reporting on the company's financial statements for the year ended December 31, Year 1, in which inventory is valued at the adjusted amounts, the auditor would most likely
Express a qualified opinion
Kar, CPA, is a staff auditor participating in the audit engagement of Fort, Inc. Which of the following circumstances most likely impairs Kar's independence?
Kar's sibling is the director of internal auditing for Fort.
An accountant has an immaterial direct financial interest in a nonpublic entity. The accountant is
Not independent and may not perform a review
In which of the following circumstances would an auditor not express an unmodified opinion?
The auditor is unable to obtain audited financial statements of a long-term investee.
When qualifying an opinion because of an insufficiency of appropriate audit evidence, an auditor of a nonissuer client should refer to the situation in the
Yes (Auditor's Responsibility Section) No (Notes to the Financial Statements)
Which of the following is an element of a CPA firm's quality control policies and procedures applicable to the firm's accounting and auditing practice?
Engagement performance
The act by a member of the AICPA that is discreditable to the accounting profession is
Failing to file a personal tax return Failing to comply with laws regarding timely filing of personal or firm tax returns or timely remittance of taxes collected for others is an act discreditable
In which of the following situations would a covered member's independence be considered to be impaired? I. The covered member maintains a checking account that is fully insured by a government deposit insurance agency at an audit-client financial institution. II. The covered member has a direct financial interest in an audit client, but the interest is maintained in a blind trust. III. The covered member owns a commercial building and leases it to an audit client. The lease is properly classified as a finance lease, and the rental income is material to the CPA.
II. The covered member has a direct financial interest in an audit client, but the interest is maintained in a blind trust. III. The covered member owns a commercial building and leases it to an audit client. The lease is properly classified as a finance lease, and the rental income is material to the CPA.
For which of the SSARS services must a practitioner be independent?
No (Preparation) No (Compilation) Yes (Review) The practitioner must be independent when providing any level of assurance, e.g., in a review or audit. Because preparations and compilations provide no assurance, the practitioner need not be independent to perform those services. However, a report is issued in a compilation. Accordingly, a lack of independence should be noted in the compilation report.
A CPA firm has decided to rely on the audit work performed by another audit firm. Which of the following procedures should the CPA firm perform when taking responsibility for the other firm's audit work?
Review the other firm's audit workpapers and reperform a subset of audit testing to validate the firm's conclusions
A member of the AICPA must not commit an act discreditable to the profession. Which of the following most likely is not considered such an act?
Withholding as a result of nonpayment of fees for a completed engagement adjusting and closing journal entries not reflected in the client's books.
Which of the following areas of professional responsibility should be observed by a CPA not in public practice?
Yes (Objectivity) No (Independence)
Under the Code of Professional Conduct of the AICPA, which of the following is required to be independent in fact and appearance when discharging professional responsibilities?
A CPA in public practice providing auditing and other attestation services.
Which of the following situations concerning consistency should the auditor not recognize in the report of an issuer?
A change in the percentage used to calculate the provision for warranty expense. A change in the calculation of warranty expense is a change in accounting estimate. Changes that affect comparability but not the consistent application of accounting principles do not require recognition in the auditor's report.
Independent auditing can best be described as
A discipline that enhances the degree of confidence that users can place in financial statements. The purpose of an audit is to provide financial statement users with an opinion by the auditor on whether the financial statements are presented fairly, in all material respects, in accordance with the applicable reporting framework (e.g., GAAP, cash basis, etc.). An auditor's opinion enhances the degree of confidence that users can place in financial statements.
An auditor's report included an additional paragraph disclosing that there is a difference of opinion between the auditor and the client for which the auditor believed an adjustment to the financial statements should be made. The opinion paragraph of the auditor's report most likely expressed
A qualified opinion.
When the client fails to include information that is necessary for the fair presentation of financial statements in the body of the statements or in the related notes, it is the responsibility of the auditor to present the information, if practicable, in the auditor's report and express
A qualified or an adverse opinion
Which of the following legal situations would be considered to impair the auditor's independence?
Actual litigation by the auditor against the current management alleging management fraud or deceit.
In which of the following should an auditor's report on the audit of a nonissuer stating an unmodified opinion refer to the lack of consistency when a material change in accounting principle has occurred?
An emphasis-of-matter paragraph following the opinion paragraph.
CPAs are required to complete engagements competently. Competence includes all of the following except
An unbiased mental attitude.
The auditor's responsibility section of an auditor's report of a nonissuer contains the following: "We did not audit the financial statements of EZ, Inc., a wholly owned subsidiary, which statements reflect total assets and revenues constituting 27% and 29%, respectively, of the related consolidated totals. Those statements were audited by other auditors, whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for EZ, Inc., is based solely on the report of the other auditors." These sentences
Assume no responsibility for the audit of the component auditor.
In which of the following situations would an auditor ordinarily choose between expressing a qualified opinion and an adverse opinion?
Conditions that cause the auditor to have substantial doubt about the entity's ability to continue as a going concern are inadequately disclosed. Inadequate disclosure of the substantial doubt about an entity's ability to continue as a going concern is a departure from GAAP, resulting in either a qualified or adverse opinion
When a scope limitation has precluded the auditor from obtaining sufficient appropriate evidence to determine whether certain client acts are illegal, (s)he would most likely express
Either a disclaimer of opinion or a qualified opinion.
The objective of assurance services is to
Enhance decision making. 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.
Under which of the following circumstances would a disclaimer of opinion not be appropriate?
Management does not provide reasonable justification for a change in accounting principles. 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 (unqualified) 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.
An adverse opinion most likely should be expressed when
Management uses an accounting policy not in accordance with the applicable reporting framework. When management uses an accounting policy not in accordance with the applicable reporting framework, an adverse opinion is expressed if (1) the misstatement of the financial statements is material and (2) the effects are pervasive.
A financial statement audit is designed to
Obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to fraud or error. Financial statements after they are prepared are verified and approved by an auditor before they are released to the key stakeholders including public at large. The auditor verifies if the statements confirm to accounting standards or framework like GAAP (Generally Accepted Accounting Principles). The auditor also needs to check if there are no errors in preparing the statement and that all material facts are revealed. Any kind of fraud should also be reported. This is done to assure that the stakeholders have access to error free and genuine financial statements that depicts true position of the organization.
A CPA's retention of client-provided records as a means of enforcing payment of an overdue audit fee is an action that is
Prohibited under the AICPA Code of Professional Conduct
Just before the client's annual physical inventory count at year-end, circumstances made the auditor's attendance impracticable. The auditor determined that alternative audit procedures did not provide sufficient appropriate audit evidence of the existence and condition of the inventory at year-end. The possible effects on the financial statements are material. But they are confined to specific accounts and are not a substantial proportion of the financial statements. Assuming the financial statements are otherwise fairly presented, the auditor should express a(n)
Qualified Opinion. The auditor expresses a qualified opinion because of an inability to obtain sufficient appropriate evidence if the possible effects on the financial statements are material but not pervasive. The possible effects of not observing the inventory count are material but not pervasive. They are confined to specific elements, accounts, or items of the financial statements and are not a substantial proportion of the financial statements.
An auditor concludes that a client's noncompliance with laws and regulations, which has a material effect on the financial statements, has not been properly accounted for or disclosed. Depending on how pervasive the effect is on the financial statements, the auditor should express either a(n)
Qualified opinion or an adverse opinion When noncompliance with laws and regulations having a material effect on the financial statements has been detected but not properly reported, the auditor should insist upon revision of the financial statements. Failure to revise the statements precludes an unmodified opinion. Depending on the pervasiveness of the misstatement, the auditor should express either a qualified opinion or an adverse opinion.
According to the AICPA Code of Professional Conduct, which of the following actions by a CPA most likely involves an act discreditable to the profession?
Retaining client records after the client demands their return.
Which of the following statements is true regarding an accountant's working papers?
The accountant owns the working papers but generally may not disclose them without the client's consent or a court order.
The date of the audit report is important because
The auditor cannot date the report earlier than the date on which sufficient appropriate evidence to support the opinion has been obtained. 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.
According to the profession's ethical standards, an auditor would be considered independent in which of the following instances?
The auditor's checking account, which is fully insured by a federal agency, is held at a client financial institution. A CPA's independence is not impaired with respect to a financial institution if checking accounts, savings accounts, or certificates of deposit are fully insured. Moreover, uninsured amounts do not impair independence if they are immaterial.
Which of the following statements best describes the distinction between the auditor's responsibilities and management's responsibilities?
The auditor's responsibility is confined to expressing an opinion, but the financial statements remain the responsibility of management. The auditor is responsible for the opinion on financial statements, but management is responsible for the representations made in the financial statements.
Which of the following best describes the reason an independent auditor reports on financial statements?
The company preparing the statements and the persons using the statements may have different interests.
In which of the following situations would an auditor ordinarily choose between expressing a qualified opinion and an adverse opinion?
The financial statements fail to disclose information that is required by the applicable reporting framework. 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.
In which of the following circumstances would an auditor of a nonissuer most likely add an emphasis-of-matter paragraph to the auditor's report while expressing an unmodified opinion?
There is substantial doubt about the entity's ability to continue as a going concern.
The following additional paragraph was included in an auditor's report of a nonissuer 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?
Unmodified After Opinion paragraph 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.
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)
Unmodified Opinion There is no limitation on scope and the CPA is satisfied for the carrying values of receivables. He need not refer to any omission of procedures or the fact of opting for alternative sources. Therefore, the CPA can express an unmodified opinion.
Billie J. King, CPA, was engaged to audit the financial statements of Newton Co. after its fiscal year had ended. King neither observed the inventory count nor confirmed the receivables by direct communication with debtors, but was satisfied concerning both after applying alternative procedures. King's auditor's report most likely contained a(n)
Unmodified Opinion. Because the auditor is satisfied as to inventory quantities and the amounts of receivables, she obtained sufficient appropriate evidence. Accordingly, the opinion is not modified.
An external auditor discovers that a payroll supervisor of the firm being audited has misappropriated $10,000. The firm's total assets and before-tax net income are $14 million and $3 million, respectively. Assuming no other issues affect the report, the external auditor's report will most likely contain a(n)
Unmodified opinion
A separate paragraph of an auditor's report of a nonissuer 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?
Unmodified opinion. 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 (an emphasis paragraph for an issuer). This paragraph does not affect the opinion expressed on the financial statements.
Green Company, an issuer, uses the first-in, first-out method of costing for its international subsidiary's inventory and the last-in, first-out method of costing for its domestic inventory. The different costing methods will cause Green's auditor to issue a report with a(n)
Unqualified Opinion The objective of the evaluation of consistency for the periods presented is to communicate in the report when the comparability of financial statements between periods has been materially affected by a change in accounting principles or by adjustments to correct a material misstatement in previous statements. Thus, the use of two different cost flow assumptions does not, by itself, affect the comparability of the entity's financial statements between periods if no accounting changes have occurred.
Which of the following are elements of a CPA firm's quality control that should be considered in establishing its quality control policies and procedures?
Yes (Human Resources) Yes (Monitoring) Yes (Engagement Performance)
An auditor may reasonably express an "except for" qualified opinion for a(n)
Yes (Scope Limitation) Yes (Unjustified Change in an Accounting Principle) A qualified opinion should be expressed if the auditor (1) has obtained sufficient appropriate audit evidence and concludes that misstatements, individually or combined, are material but not pervasive to the financial statements or (2) is unable to obtain sufficient appropriate audit evidence but concludes that the possible effects on the financial statements of undetected misstatements, if any, could be material but not pervasive. A misstatement results from, for example, an inappropriate selection or application of an accounting principle. Among other things, the auditor evaluates whether the entity has justified that the alternative principle is preferable. An inability to obtain sufficient appropriate evidence is a scope limitation. Thus, an unjustified change in principle or a scope limitation may require expression of a qualified opinion. NOTE: All qualified opinions are "except for" opinions.
On June 1, Year 1, a CPA obtained a $100,000 personal loan from a financial institution client for whom the CPA provided compilation services. The loan was fully secured and considered material to the CPA's net worth. The CPA paid the loan in full on December 31, Year 1. On April 3, Year 2, the client asked the CPA to audit the client's financial statements for the year ended December 31, Year 2. Is the CPA considered independent with respect to the audit of the client's December 31, Year 2, financial statements?
Yes, because the CPA was not required to be independent at the time the loan was granted
A CPA purchased stock in an audit client corporation and placed it in a revocable educational trust for the CPA's dependent minor child. The trust securities were not material to the CPA but were material to the child's personal net worth. Is the independence of the CPA considered to be impaired with respect to the client?
Yes, because the stock is considered a direct financial interest and, consequently, materiality is not a factor.
Notes that are included with financial statements are the responsibility of the
company's management