CPA Topics Test 2
Which of the following ordinarily involves the addition of an emphasis-of-matter paragraph to an audit report of a nonpublic company?
*A. A consistency modification.* B. An adverse opinion. C. A qualified opinion. D. Part of the audit has been performed by component auditors.
The auditors who wish to draw reader attention to a financial statement note disclosure on significant transactions with related parties should disclose this fact in:
*A. An emphasis-of-matter paragraph to the auditors' report.* B. A footnote to the financial statements. C. The body of the financial statements. D. The "summary of significant accounting policies" section of the financial statements.
When auditing the statement of cash flows, which of the following would an auditor notexpect to be a source of receipts and payments?
*A. Capitalization* B. Financing C. Investing D. Operations
In an audit report on combined financial statements, reference to the fact that a portion of the audit was performed by a component auditor is:
*A. Not to be construed as a qualification, but rather as a division of responsibility between the two CPA firms.* B. Not in accordance with generally accepted auditing standards. C. A qualification that lessens the collective responsibility of both CPA firms. D. An example of a dual opinion requiring the signatures of both auditors.
A. January 7, 20X4: The mineral content of a shipment of ore en route to Hollis Mfg. Corporation on December 31, 20X3, was determined to be 72 percent. The shipment was recorded at year-end at an estimated content of 50 percent by a debit to Raw Materials Inventory and a credit to Accounts Payable in the amount of $82,400. The final liability to the vendor is based on the actual mineral content of the shipment.
*Adjustment* or Consider Disclosure
A. On January 3, 20X4, Flowmeter, Inc., received a shipment of raw materials from Canada. The materials had been ordered in October 20X3 and shipped FOB shipping point in December 20X3.
*Adjustment* or Consider Disclosure
B. On January 15, 20X4, the company settled and paid a personal injury claim of a former employee as the result of an accident that had occurred in March 20X3. The company had not previously recorded a liability for the claim.
*Adjustment* or Consider Disclosure
D. On January 18, 20X4, a major customer filed for bankruptcy. The customer's financial condition had been degenerating over recent years.
*Adjustment* or Consider Disclosure
Type 1
1. Additional evidence about conditions that existed at the balance sheet date 2. During the audit, a customer with a large A/R balance at year-end declares bankruptcy 3. A lawsuit that was in progress as of the year-end was settled shortly thereafter
Type 2
1. Conditions that have come into existence after the balance sheet date 2. A flood damages a significant portion of the operating facilities after year-end
Letter dated: 2/14, Year 2: "I advise you that at and since December 31, year 1, I have not been engaged to give substantive attention to, or represent, XYZ Co. in connection with any pending or threatened litigation, claims, or assessments, nor am I aware of any loss contingencies. No amounts were due to this office for services provided at December 31, year 1."
1. No impact on the financial statement amounts or notes 7. Legal response is appropriately dated
Official document: 1. "Certified Public Accountant's Report" 2. "Sam Best, President" 3. "Basis for Qualified Opinion: The Company has excluded from property and debt in the accompanying balance sheets certain lease obligations that, in our opinion, should be capitalized in order to conform with accounting principles generally accepted in the United States of America. If these lease obligations were capitalized, property would be increased by $3,500,000, long-term debt by $3,500,000, and retained earnings by $500,000 as of December 31, 20X5. Additionally, net income would be increased by $500,000 and earnings per share would be increased by $1.12 for the year then ended." 4. "and subject to the accounting change described in the Emphasis of Matter paragraph" 5. "As discussed in Note 4 to the financial statements, in 20X5 the entity elected to change the estimated life of a number of its plant assets. We concur with this change." 6. "Adams, Barnes & Co." 7. "February 6, 20X6."
1. Replace with "Independent Auditor's Report" 2. Replace with "Board of Directors of Keystone" 3. Retain the original text. 4. Delete the text. 5. Delete entire paragraph. 6. Retain the original text. 7. Replace with "January 31, 20X6, except for Note 7, as to which the date is February 2, 20X6."
A client changed the depreciable life of certain assets from 10 years to 12 years. The auditor concurs with the change.
1. Unmodified—standard.
A client changed the method it uses to calculate postemployment benefits from one acceptable method to another. The effect of the change is immaterial this year but is expected to be material in the future.
1. Unmodified—standard.
A client changed the salvage value of certain assets from 5 percent to 10 percent of original cost. The auditor concurs with the change.
1. Unmodified—standard.
A client is issuing two years of comparative financial statements. The first year was audited by another auditor who is being asked to reissue her audit report. (Reply as to the successor auditors' report.)
1. Unmodified—standard.
A client uses the specific identification method of accounting for valuable items in inventory, and LIFO for less valuable items. The auditor concurs that this is a reasonable practice.
1. Unmodified—standard.
A company has not followed generally accepted accounting principles in the recording of its leases. The amounts involved are immaterial.
1. Unmodified—standard.
An auditor reporting on group financial statements decides to take responsibility for the work of a component auditor who audited a 70 percent owned subsidiary and issued an unmodified opinion. The total assets and revenues of the subsidiary are 5 percent and 8 percent, respectively, of the total assets and revenues of the entity being audited.
1. Unmodified—standard.
An auditor was hired after year-end and was unable to observe the counting of the year-end inventory. However, she was able to apply other procedures and determined that ending inventory and related information are properly stated.
1. Unmodified—standard.
In auditing the long-term investments account of a new client, an auditor finds that a large contingent liability exists that is material to the consolidated company. It is probable that this contingent liability will be resolved with a material loss in the future, but the amount is not estimable. Although no adjusting entry has been made, the client has provided a note to the financial statements that describes the matter in detail.
1. Unmodified—standard.
A client is issuing two years of comparative financial statements. The first year was audited by another auditor who is not being asked to reissue her audit report. (Reply as to the successor auditors' report.)
10. Other
An auditor reporting on group financial statements decides not to take responsibility for the work of a component auditor who audited a 70 percent owned subsidiary and issued an unqualified opinion. The total assets and revenues of the subsidiary are 5 percent and 8 percent, respectively, of the total assets and revenues of the entity being audited.
10. Other
Letter dated 2/26, Year 2: K. Bowt v. XYZ Co.: This matter commenced in December, year 1. The plaintiff alleges discrimination relating to his termination on November 17, year 1. The company intends to defend this case vigorously. At this time, we are unable to evaluate the likelihood of an unfavorable outcome or estimate the amount or range of potential loss.
2. Disclosure in notes relating to nature of litigation, but no amount disclosed 9. Update audit report date
Letter dated 3/16, Year 2: J. Myers v. XYZ Co.: This matter commenced in March, year 2. The plaintiff alleges discrimination relating to his termination on November 17, year 1. The company intends to defend this case vigorously. At this time, we are unable to evaluate the likelihood of an unfavorable outcome. The plaintiff is demanding $50,000.
2. Disclosure in notes relating to nature of litigation, but no amount disclosed 9. Update audit report date
A client changed its depreciation method for production equipment from the straight-line method to the units-of-production method based on hours of utilization. The auditor concurs with the change.
2. Unmodified with an emphasis-of-matter paragraph.
A client's financial statements follow GAAP, but the auditor wishes to emphasize in his audit report a significant related party transaction that is adequately described in the notes to the financial statements.
2. Unmodified with an emphasis-of-matter paragraph.
Due to recurring operating losses and working capital deficiencies, an auditor has substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. The notes to the financial statements adequately disclose the situation. The auditor has decided not to issue a disclaimer of opinion.
2. Unmodified with an emphasis-of-matter paragraph.
Letter dated 2/14, Year 2: R. Brown v. XYZ Co.: This matter commenced in November, year 1. The plaintiff alleges discrimination relating to his termination on March 17, year 1. It is reasonably possible that the case will be settled for approximately $35,000.
3. Disclosure in notes relating to nature of litigation, including loss amount 7. Legal response is appropriately dated
A client changed the depreciable life of certain assets from 10 years to 12 years. The auditor does not concur with the change. Confined to fixed assets and accumulated depreciation, the misstatements involved are not considered pervasive.
3. Qualified
An auditor discovered that a client made illegal political payoffs to a candidate for president of the United States. The auditor was unable to determine the amounts associated with the payoffs because of the client's inadequate record-retention policies. Although there is no likelihood that the financial statements are pervasively misstated, they may be materially misstated. The client refuses to disclose the payoffs in a note to the financial statements.
3. Qualified
Due to recurring operating losses and working capital deficiencies, an auditor has substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. The notes to the financial statements do not adequately disclose the substantial doubt situation, and the auditor believes the omission fundamentally affects the users' understanding of the financial statements.
4. Adverse
Letter dated 2/14, Year 2: L. Peep v. XYZ Co.: This matter commenced in November, year 1. The plaintiff alleges discrimination relating to his termination on March 17, year 1. The case is tentatively settled for $35,000.
4. Potential litigation settlement accruedin financial statements 7. Legal response is appropriately dated
Letter dated 1/21, Year 2: "I advise you that at and since December 31, year 1, I have not been engaged to give substantive attention to, or represent, XYZ Co. in connection with any pending or threatened litigation, claims, or assessments, nor am I aware of any loss contingencies. There were fees outstanding of $3,675 due to this office for services provided at December 31, year 1."
6. Verify amount due attorney is recorded in financial statement amounts 8. Update legal response
A client's financial statements follow GAAP except that they do not include a note on a significant related party transaction.
7. Qualified or Adverse
In auditing the long-term investments account of a new client, an auditor finds that a large contingent liability exists that is material to the consolidated company. It is probable that this contingent liability will be resolved with a material loss in the future, and this amount is reasonably estimable as $2,000,000. Although no adjusting entry has been made, the client has provided a note to the financial statements that describes the matter in detail and includes the $2,000,000 estimate in that note.
7. Qualified or Adverse
A client changed its depreciation method for production equipment from the straight-line to a units-of-production method based on hours of utilization. The auditor does not concur with the change.
7. Qualified or adverse.
A company has not followed generally accepted accounting principles in the recording of its leases.
7. Qualified or adverse.
A company valued its inventory at current replacement cost. Although the auditor believes that the inventory costs do approximate replacement costs, these costs do not approximate any GAAP inventory valuation method.
7. Qualified or adverse.
An auditor discovered that a client made illegal political payoffs to a candidate for president of the United States. The auditor was unable to determine the amounts associated with the payoffs because of the client's inadequate record-retention policies. The client has added a note to the financial statements to describe the illegal payments and has stated that the amounts of the payments are not determinable.
8. Qualified or Disclaimer
An auditor was hired after year-end and was unable to observe the counting of the year-end inventory. She is unable to apply other procedures to determine whether ending inventory and related information are properly stated.
8. Qualified or Disclaimer
Which of the following is most likely to be considered a Type 1 subsequent event?
A. A business combination completed after year-end, but for which negotiations began prior to year-end. B. A strike subsequent to year-end due to employee complaints about working conditions that originated two years ago. *C. Customer checks deposited prior to year-end but determined to be uncollectible after year-end.* D. Introduction of a new line of products after year-end for which major research had been completed prior to year-end.
Which of the following events occurring on January 5, 20X2, is most likely to result in an adjusting entry to the 20X1 financial statements?
A. A business combination. B. Early retirement of bonds payable. *C. Settlement of litigation.* D. Plant closure due to a strike.
Assume that the opinion paragraph of an auditors' report begins as follows: "With the explanation given in Note 6, . . . the financial statements referred to above present fairly . . ." This is:
A. An unmodified opinion. B. A disclaimer of opinion. C. An "except for" opinion. *D. An improper type of reporting.*
A possible loss, stemming from past events that will be resolved as to existence and amounts, is referred to as a(n):
A. Analytical process. *B. Loss contingency.* C. Probable loss. D. Unasserted claim.
The search for unrecorded liabilities for a public company includes procedures usually performed through the:
A. Day the audit report is issued. B. End of the client's year. *C. Date of the auditors' report.* D. Date the report is filed with the SEC.
An auditor accepted an engagement to audit the 20X8 financial statements of EFG Corporation and began the fieldwork on September 30, 20X8. EFG gave the auditor the 20X8 financial statements on January 17, 20X9. The auditor completed the audit on February 10, 20X9, and delivered the report on February 16, 20X9. The client's representation letter normally would be dated:
A. December 31, 20X8. B. January 17, 20X9. *C. February 10, 20X9.* D. February 16, 20X9.
Which of the following is the best way for the auditors to determine that every name on a company's payroll is that of a bona fide employee presently on the job?
A. Examine human resources records for accuracy and completeness. B. Examine employees' names listed on payroll tax returns for agreement with payroll accounting records. C. CORRECT Make a surprise observation of the company's regular distribution of paychecks on a test basis. D. Visit the working areas and verify that employees exist by examining their badge or identification numbers.
As a result of analytical procedures, the independent auditors determine that the gross profit percentage has declined from 30 percent in the preceding year to 20 percent in the current year. The auditors should:
A. Express an opinion that is qualified due to the inability of the client company to continue as a going concern. B. Evaluate management's performance in causing this decline. C. Require note disclosure. D. CORRECT Consider the possibility of a misstatement in the financial statements.
An audit report for a public client indicates that the audit was performed in accordance with:
A. Generally accepted auditing standards (United States). *B. Standards of the Public Company Accounting Oversight Board (United States).* C. Generally accepted accounting principles (United States). D. Generally accepted accounting principles (Public Company Accounting Oversight Board).
An audit report for a public client indicates that the financial statements were prepared in conformity with:
A. Generally accepted auditing standards (United States). B. Standards of the Public Company Accounting Oversight Board (United States). *C. Generally accepted accounting principles (United States).* D. Generally accepted accounting principles (Public Company Accounting Oversight Board).
Which of the following is least likely to be considered a substantive procedure relating to payroll?
A. Investigate fluctuations in salaries, wages, and commissions. B. Test computations of compensation under profit sharing for bonus plans. C. Test commission earnings. D. CORRECT Test whether employee time reports are approved by supervisors.
Subsequent to the issuance of the auditor's report, the auditor became aware of facts existing at the report date that would have affected the report had the auditor then been aware of such facts. After determining that the information is reliable, the auditor should next:
A. Notify the board of directors that the auditor's report must no longer be associated with the financial statements. *B. Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information.* C. Request that management disclose the effects of the newly discovered information by adding a footnote to subsequently issued financial statements. D. Issue revised pro forma financial statements taking into consideration the newly discovered information.
Which of the following procedures is most likely to be included near completion of an audit?
A. Obtaining an understanding of internal control. B. Confirmation of receivables. C. Observation of inventory. *D. Performing analytical procedures.*
The auditors' report should be dated as of the date the:
A. Report is delivered to the client. *B. Auditors have accumulated sufficient appropriate evidence.* C. Fiscal period under audit ends. D. Peer review of the working papers is completed.
Which of the following is least likely to result in inclusion of an additional paragraph being added to an audit report?
A. The company is a component of a larger business enterprise. B. An unusually important significant event. *C. A decision not to confirm accounts receivable.* D. A risk or uncertainty.
An entity changes its depreciation method for production equipment from straight-line to a units-of-production method based on hours of utilization. The auditor concurs with the change, although it has a material effect on the comparability of the entity's financial statements.
A. Unmodified I. Add an emphasis-of-matter paragraph—after opinion paragraph.
Due to recurring operating losses and working capital deficiencies, an auditor has substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. However, the financial statement disclosures concerning these matters are adequate. The auditor has decided not to issue a disclaimer of opinion.
A. Unmodified I. Add an emphasis-of-matter paragraph—after opinion paragraph.
A group auditor decides to take responsibility for the work of a component CPA who audited a wholly owned subsidiary of the entity and issued an unmodified opinion. The total assets and revenues of the subsidiary represent 17 percent and 18 percent, respectively, of the total assets and revenues of the entity being audited.
A. Unmodified M. Issue standard report without alteration.
A material departure from generally accepted accounting principles will result in auditor consideration of:
A. Whether to issue an adverse opinion rather than a disclaimer of opinion. B. Whether to issue a disclaimer of opinion rather than a qualified opinion. *C. Whether to issue an adverse opinion rather than a qualified opinion.* D. Nothing, because none of these opinions is applicable to this type of exception.
Income Statement items relating to Balance Sheet
A/R - Bad Debt N/P - Interest PPE - Depreciation Securities or Other Investments - Gains on Sale Intangible Assets - Amortization
Type 1 subsequent events require the financial statements to be _______ if needed.
Adjusted
Type 1 subsequent events require ______ of the financial statements.
Adjustment
B. January 15, 20X4: Following a series of personal disagreements between Ray Hollis, the president, and his brother-in-law, the treasurer, the latter resigned, effective immediately, under an agreement whereby the corporation would purchase his 10 percent stock ownership at book value as of December 31, 20X3. Payment is to be made in two equal amounts in cash on April 1 and October 1, 20X4. In December, the treasurer had obtained a divorce from his wife, who is Ray Hollis's sister.
Adjustment or *Consider Disclosure*
C. On January 25, 20X4, the company agreed to purchase for cash the outstanding stock of Porter Electrical Co. The business combination is likely to double the sales volume of Flowmeter, Inc.
Adjustment or *Consider Disclosure*
D. On February 1, 20X4, a plant owned by Flowmeter, Inc., was damaged by a flood, resulting in an uninsured loss of inventory.
Adjustment or *Consider Disclosure*
E. On February 5, 20X4, Flowmeter, Inc., issued to an underwriting syndicate $2 million in convertible bonds.
Adjustment or *Consider Disclosure*
E. On January 28, 20X4, a famous analyst who followed the industry provided a negative report on his expectations concerning the short and intermediate term for the industry.
Adjustment or *Consider Disclosure* *Least like to be reflected in financial statements*
C. January 16, 20X4: As a result of reduced sales, production was curtailed in mid-January and some workers were laid off.
Adjustment or *Consider Disclosure* *Least likely to be reflected in the financial statements*
A(n) _____ opinion is appropriate if a material misstatement is considered pervasive.
Adverse
E. The client has changed from LIFO to FIFO for inventory valuation purposes; the auditors do not concur with this change. The effect is considered material and pervasive.
Adverse
A material misstatement is considered pervasive
Adverse Opinion
The client has elected to not follow GAAP
Adverse Opinion
Affects Audit Efficiency: Assessing control risk too high; Performing more testing than necessary
Affects Audit Effectiveness: Assessing control risk too low; Not performing enough testing
Type 2 subsequent events come into existence _____ the balance sheet date.
After
Auditors may add an emphasis-of-matter paragraph that refers to a matter that is _________ presented or disclosed.
Appropriately
Tests of controls typically use __________ plans.
Attributes sampling
An entity discloses certain lease obligations in the notes to the financial statements. The auditor believes that the failure to capitalize these leases is a departure from generally accepted accounting principles and, although the possible effects on the financial statements of the misstatements are material, they could not be pervasive.
B. Qualified J. Add a basis-for-modification paragraph—prior to opinion paragraph.
Auditors consider the ______ expense when determining the correct allowance for doubtful accounts.
Bad Debt
Revenue and expense accounts are audited in conjunction with related __________ accounts.
Balance Sheet
Type 1 subsequent events involve events that existed _____ the balance sheet date.
Before
The audit of inventories may help in the auditor determination of ________.
COGS
Strata may be ______to provide an estimate of the population as a whole.
Combined
1. A contractual obligation to carry out a transaction at specified terms in the future. Material commitments should be disclosed in the financial statements.
Commitment
2. A possible liability, stemming from past events, that will be resolved as to existence and amount by some future event.
Contingent Liability
It is difficult to audit ______without the consideration of the property account.
Depreciation
Stratifying a population can also allow the auditor to perform ____ procedures to each stratum.
Different
Auditors _____ an opinion when they are unable to form an opinion.
Disclaim
A. Client-imposed restrictions significantly limit the scope of the auditors' procedures, and they are unable to obtain sufficient appropriate audit evidence. The possible effects on the financial statements of undetected misstatements, if any, could be both material and pervasive.
Disclaimer
In addition to an emphasis-of-matter paragraph, auditors could issue a(n) _________ in a going concern situation.
Disclaimer
Auditors determine that the possible effects on the financial statements of the inability to obtain sufficient evidence (i.e. a scope limitation) could be both material and pervasive
Disclaimer of Opinion
Changes in accounting estimates ______ result in an explanatory paragraph.
Do Not
An audit needs to have the correct balance of efficiency and _________.
Effectiveness
Audit _______is affected when too much substantive testing is done.
Efficiency
B. Draves Company owns substantial properties that have appreciated significantly in value since the date of purchase. The properties were appraised and are reported in the balance sheet at the appraised values (which materially exceed costs) with related disclosures. The CPAs believe that the appraised values reported in the balance sheet reasonably estimate the assets' current values.
Either qualified or adverse
E. Slade Company has material investments in stocks of subsidiary companies. Stocks of the subsidiary companies are actively traded in the market. Management insists that all investments be carried at original costs, and the CPA firm is satisfied that the original costs are accurate. The CPA firm believes that the client will never ultimately realize a substantial portion of the investments because the market value is much lower than the cost; the client has fully disclosed the facts in notes to the financial statements.
Either qualified or adverse
C. During the audit of Eagle Company, the CPA firm has encountered a significant scope limitation relating to inventory record availability and is unable to obtain sufficient appropriate audit evidence in that area.
Either qualified or disclaimer
2. A change in the estimated service lives of previously recorded plant assets based on newly acquired information.
Emphasis-of-Mater Paragraph on Consistency Added? No
6. A change to including the employer's share of FICA taxes as "Retirement benefits" on the income statement. This information was previously included with "Other taxes."
Emphasis-of-Mater Paragraph on Consistency Added? No
1. A change from the completed-contract method to the percentage-of-completion method of accounting for long-term construction contracts.
Emphasis-of-Mater Paragraph on Consistency Added? Yes
3. Correction of a mathematical error in inventory pricing made in a prior period.
Emphasis-of-Mater Paragraph on Consistency Added? Yes
4. A change from direct costing to full absorption costing for inventory valuation.
Emphasis-of-Mater Paragraph on Consistency Added? Yes
5. A change from deferring and amortizing preproduction costs to recording such costs as an expense when incurred because future benefits of the costs have become doubtful. The new accounting method was adopted in recognition of the change in estimated future benefits.
Emphasis-of-Mater Paragraph on Consistency Added? Yes
7. A change from the FIFO method of inventory pricing to the LIFO method of inventory pricing.
Emphasis-of-Mater Paragraph on Consistency Added? Yes
If substantial doubt about a going concern exists, an ______ paragraph is the most common resolution.
Emphasis-of-matter
When there is significant doubt as to the ability to continue as a going concern, a(n) _________ paragraph may be added.
Emphasis-of-matter
Limitations on the scope of an audit may create a situation in which the auditors are unable to obtain sufficient ________.
Evidence
Type 1 subsequent events come into existence due to new ______becoming available.
Evidence
When items are identified that affect the going concern assumption, auditors must gather ________.
Evidence
In auditing the long-term investments account, an auditor is unable to obtain audited financial statements for an investee located in a foreign country. The auditor concludes that sufficient appropriate audit evidence regarding this investment cannot be obtained.
F. Qualified or Disclaimer J. Add a basis-for-modification paragraph—prior to opinion paragraph.
8. Misstatements about which there is no doubt as to amount.
Factual Misstatements
The CPA's opinion on the ______of the financial statements may be changed by subsequent events.
Fairness
An emphasis-of-matter paragraph always _______ the opinion paragraph.
Follows
6. An element of the business environment that involves some risk of a future loss. Examples include the risk of accident, strike, price fluctuations, or natural catastrophe. General risk contingencies should not be disclosed in financial statements.
General Risk Contingency
Amortization relates to ______assets like depreciation relates to property and equipment.
Intangible
4. An approach to making materiality judgments that quantifies the total likely misstatement as of the current year-end based on the effects of reflecting all misstatements (including projecting misstatements where appropriate) existing in the balance sheet at the end of the current year, irrespective of whether the misstatements occurred in the current year or previous years.
Iron Curtain Approach
Many subsequent events may involve the settling of ________.
Litigation
3. A possible loss, stemming from past events, that will be resolved as to existence and amount by some future event.
Loss Contingency
Auditors must carefully control the risk of assessing risk too high or _____when performing test of controls.
Low
Qualified opinions are issued when the financial statements are ________ misstated.
Materially
Subsequent events need to be disclosed in the financial statements; otherwise, the financial statements would be_______.
Misleading
Material fluctuations revealed by analytical procedures should be investigated to determine whether they are indicative of material __________ in the financial statements.
Misstatements
When the auditors estimate sampling risk using professional judgment rather than by using the laws of probability, they are said to be using __________ sampling.
Non-statistical
Auditors are _____ required to perform procedures specifically designed to test the going concern assumption.
Not
A going concern evaluation should include evaluation of ________ from the balance sheet date.
One Year
A going concern is to be evaluated for a period not to exceed _________ beyond the date of the financial statements.
One Year
An emphasis-of-matter paragraph always follows the ______ paragraph.
Opinion
The aggregated misstatement in the financial statements is made up of:
Option (1): Factual Misstatements- Yes Projected Misstatements- Yes Judgmental Misstatements- Yes
A nonpublic company's change in accounting principles that the auditors believe is not justified is likely to result in which of the following types of audit opinions?
Option 2: Qualified - Yes Unmodified with Emphasis of Matter - No
What type or types of audit opinion are appropriate when financial statements are materially and pervasively misstated?
Option 3: Qualified - No Adverse - Yes
When the matter is properly disclosed in the financial statements of a nonpublic company, the likely result of substantial doubt about the ability of the client to continue as a going concern is the issuance of which of the following audit opinions?
Option 3: Qualified - No Unmodified with Emphasis of Matter - Yes
When paper paychecks are issued, the company's _____________ should distribute them to the employees of the company.
Paymaster
Type 2 subsequent events occur after the balance sheet date but ____ the completion of fieldwork.
Prior to
Financial statements that give effect to a subsequent event as though the event had occurred at the balance sheet date are known as __________ financial statements.
Pro Forma
7. Misstatements identified by the auditors during the course of the audit that are due to extrapolation of sample results to the entire population.
Projected Misstatements
C. The auditors believe that the financial statements have been presented in conformity with generally accepted accounting principles in all respects, except that a loss contingency that should be disclosed through a note to the financial statements is not included. While they consider this a material omission, they do not believe that it pervasively affects the financial statements.
Qualified
D. London Company has material investments in stocks of subsidiary companies. Stocks of the subsidiary companies are not actively traded in the market, and the CPA firm's engagement does not extend to any subsidiary company. The CPA firm is able to determine that all investments are carried at original cost but has no real idea of market value. Although the difference between cost and market could be material, it could not have a pervasive effect on the overall financial statements.
Qualified
Assessing the control risk too low results in an inappropriate _______ of the extent of substantive procedures.
Reduction
5. An approach to making materiality judgments that quantifies the total likely misstatement as of the current year-end based on the effects of reflecting misstatements (including projecting misstatements where appropriate) only during the current year.
Rollover Approach
Inherent in the use of sampling is ________ risk which is the possibility of selecting a sample that is not representative of the population.
Sampling
Stratified sample results can be used _______or combined.
Separately
Stratification is the technique of dividing a population into subgroups called ______.
Strata
The term __________ refers to the process of dividing a population into relatively homogeneous subgroups.
Stratification
Auditors often ______ a population before computing the required sample size.
Stratify
An event occurring after the date of the balance sheet, but prior to completion of the audit, is called a __________
Subsequent Event
Audit effectiveness is impacted when the auditor doesn't do enough _______.
Testing
Report of Independent Registered Public Accounting Firm (Point 1) To Jordan Company and its shareholders (Point 2) Opinion on the Financial Statements We have audited the accompanying balance sheets of Jordan Company (the "Company") as of December 31, 20X7 and 20X6, the related statements of income, comprehensive income, stockholders' equity, and cash flows, for each of the three years in the period ended December 31, 20X7, and the related notes [and schedules] (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20X7 and 20X6, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 20X7, in conformity with accounting principles generally accepted in the United States of America. As indicated in the next paragraph, the Company has a change in Accounting Principles in 20X7. (Point 3) Change in Accounting Principles As discussed in Note 2 to the consolidated financial statements, the Company adopted the first-in-first-out method of inventory valuation in 20X7. Our opinion is not modified with respect to this matter. (Point 4) Basis for Opinion (Point 5) Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. (Point 6) Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters (Point 7) The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to management (Point 8) and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. [Assume critical audit matters properly described] Johnson & Barkley, CPAs We have served as the Company's auditor since 20X0. (Point 9) Los Angeles, California December 31, 20X8 (Point 10)
The report's title is incorrect as it should not include the word "independent." -- Incorrect The report also must be addressed to the board of directors. -- Correct The change in accounting principles should not be referred to in the opinion paragraph—delete that sentence. -- Correct The Change in Accounting Principles paragraph should include the dollar effect of the change. -- Incorrect The Basis for Opinion section should begin with a statement that the financial statements are the responsibility of management. -- Correct The sentence should state generally accepted auditing standards of the PCAOB. -- Incorrect When critical matters exist, the two related paragraphs (this and the following paragraph) should immediately follow the opinion paragraph. -- Incorrect The point should say communicated to the audit committee. -- Correct This disclosure also must include the name of the engagement partner. -- Incorrect The report should be dated as of February 12, the date on which sufficient appropriate audit evidence was obtained. -- Correct
To use attributes sampling tables, the auditors must stipulate the desired risk of assessing control risk too low, the expected deviation rate in the population, and the desired __________.
Tolerable Deviation Rate
Financial statements that _______ the results almost never lead to legal action by financial statement users.
Understate
B. The auditors decide not to make reference to the report of a component auditor that audited a portion of group financial statements.
Unmodified -- Standard
Auditors have obtained sufficiently appropriate evidence to conclude that the financial statements are not materially misstated
Unmodified Opinion
A. Bowles Company is engaged in a hazardous trade and has obtained insurance coverage related to the hazard. Although the likelihood is remote, a material portion of the company's assets could be destroyed by a serious accident.
Unmodified—standard report
D. The client has changed from LIFO to FIFO for inventory valuation purposes; the auditors concur with this change. The effect is considered material to the financial statements, although inventory is not a large part of total assets.
Unmodified—with an emphasis-of-matter paragraph
Auditors have doubt about a company's ability to continue as a going concern
Unqualified Opinion with Emphasis-of-Matter Paragraph
The auditors issue a qualified opinion or a(n) __________ opinion, if they consider the disclosure in the client's financial statements to be inadequate.
adverse
All nonpublic company audit reports that are qualified should contain a(n) __________ explaining the details of the qualification.
basis for modification paragraph (or basis for qualified opinion paragraph)
Responsibility for the preparation and fair presentation of the financial statements rests with the __________.
management
When a nonpublic client elects to change accounting principles from one acceptable principle to another acceptable principle and the auditors agree the change is desirable, they should issue a report with a(n) __________ opinion.
unmodified
A(n) __________ opinion is an opinion that the financial statements of a public company fairly present financial position, results of operations, and cash flows, in conformity with generally accepted accounting principles.
unqualified
