Audit 1 Questions
An auditor would express an unmodified opinion with an emphasis-of-matter paragraph added to the auditor's report for: An unjustified accounting change A material weakness in internal control a. No No b. No Yes c. Yes Yes d. Yes No
Explanation Choice "a" is correct. An unjustified accounting change may cause the auditor to issue a qualified or adverse opinion. A material weakness must be reported to management and those charged with governance, but would not be disclosed in an emphasis-of-matter paragraph added to an otherwise unmodified opinion.
An auditor reads the letter of transmittal accompanying a county's comprehensive annual financial report and identifies a material inconsistency with the financial statements. The auditor determines that the financial statements do not require revision. Which of the following actions should the auditor take? a. Request that the client revise the letter of transmittal. b. Consider withdrawing from the engagement. c. Request a client representation letter acknowledging the inconsistency. d. Include an other-matter paragraph in the auditor's report.
Explanation Choice "a" is correct. When information accompanies audited financial statements in a client-prepared document, the auditor is required to read the information. If such information is materially inconsistent with the financial statements and the financial statements do not require revision, the auditor should request that the information (in this case the letter of transmittal) be revised.
Cooper, CPA, believes there is substantial doubt about the ability of Zero Corp. to continue as a going concern for a reasonable period of time. In evaluating Zero's plans for dealing with the adverse effects of future conditions and events, Cooper most likely would consider, as a mitigating factor, Zero's plans to: a. Purchase production facilities currently being leased from a related party. b. Postpone expenditures for research and development projects. c. Discuss with lenders the terms of all debt and loan agreements. d. Strengthen internal controls over cash disbursements.
Explanation Choice "b" is correct
Pell, CPA, decides to serve as group engagement partner in the audit of the financial statements of Tech Consolidated, Inc. Smith, CPA, audits one of Tech's subsidiaries. In which situation(s) should Pell make reference to Smith's audit under U.S. GAAS? I. Pell reviews Smith's audit documentation and assumes responsibility for Smith's work, but expresses a qualified opinion on Tech's financial statements. II. Pell is unable to review Smith's audit documentation; however, Pell's inquiries indicate that Smith has an excellent reputation for professional competence and integrity. a. Both I and II. b. II only. c. I only. d. Neither I nor II.
Explanation Choice "b" is correct. Under U.S. GAAS, the group engagement partner makes reference in the audit report to the work of the component auditor when the group engagement partner is unable to review the component auditor's audit documentation. This is because the group engagement partner will be unable to be satisfied concerning the work performed by the component auditor. Even though the component auditor has an excellent reputation, the group engagement partner must see the work to be able to assume responsibility for it. Note that under ISAs, no reference is made to the component auditor unless required by law or regulation.
When an independent CPA is associated with the financial statements of a publicly held entity but has not audited or reviewed such statements, the appropriate form of report to be issued must include a(an): a. Regulation S-X exemption. b. Disclaimer of opinion. c. Unaudited association report. d. Report on pro forma financial statements.
Explanation Choice "b" is correct. When an accountant is associated with the financial statements of a public entity, but has not audited or reviewed such statements, the accountant must issue a report disclaiming any opinion on the statements.
When there has been a change in accounting principle that materially affects the comparability of the comparative financial statements presented and the auditor concurs with the change, the auditor should: 1) Concur explicitly with the change 2) Issue an "except for" qualified opinion 3) Refer to the change in an emphasis-of-matter paragraph a. Yes No Yes b. Yes Yes No c. No Yes No d. No No Yes
Explanation Choice "d" is correct. No - No - Yes. When a change in accounting principle materially affects the comparability of the comparative FS, the auditor should refer to the change in an emphasis-of-matter paragraph following the unmodified opinion paragraph.
When an auditor qualifies an opinion because of the inability to confirm accounts receivable by direct communication with debtors, the wording of the basis of qualified opinion paragraph of the auditor's report should indicate that the qualification pertains to the: a. Limitation on the auditor's scope. b. Departure from generally accepted auditing standards. c. Lack of sufficient appropriate audit evidence. d. Possible effects on the financial statements.
Explanation Choice "d" is correct. When an auditor qualifies his or her opinion because of a scope limitation, such as the inability to confirm A/R, the wording in the basis for modification of opinion paragraph should indicate that the qualification pertains to the possible effects on the FS and not to the scope limitation itself.
Green, CPA, concludes that there is substantial doubt about JKL Co.'s ability to continue as a going concern. If JKL's financial statements adequately disclose its financial difficulties, Green's auditor's report under U.S. auditing standards should: 1) Include an emphasis -of-matter paragraph following the opinion paragraph 2) Specifically use the words "going concern" 3) Specifically use the words "substantial doubt" a. Yes Yes Yes b. No Yes Yes c. Yes Yes No d. Yes No Yes
Explanation Choice "a" is correct. "Yes - Yes - Yes." When a CPA concludes that there is substantial doubt about an entity's ability to continue as a going concern and the entity adequately discloses its financial difficulties, an unmodified opinion is appropriate. An emphasis-of-matter paragraph (following the opinion paragraph) should be used to highlight the situation. This paragraph should include the phrases "substantial doubt" and "going concern." Under ISAs, the report uses the phrase "significant doubt", rather than "substantial doubt."
Green, CPA, is requested to prepare a written report on the application of the requirements of an applicable financial reporting framework to a specific transaction by an entity that is audited by another CPA. Green may: a. Accept the engagement but should consult with the continuing CPA to ascertain all the available facts relevant to forming a professional judgment. b. Not accept such an engagement because Green would lack the necessary information on which to write such a report without conducting an audit. c. Not accept such an engagement because to do so would be considered unethical. d. Accept the engagement but should form an independent opinion without consulting with the continuing CPA.
Explanation Choice "a" is correct. A "reporting accountant" may accept the engagement, but should request permission from the entity's management to consult with the "continuing CPA" to ascertain the available facts relevant to forming a professional judgment. If the reporting CPA determines it is not necessary to consult with the continuing CPA, the reporting accountant should document the rationale for not consulting.
Which of the following auditing procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern? a. Confirming with third parties the details of arrangements to maintain financial support. b. Comparing the entity's depreciation and asset capitalization policies to other entities in the industry. c. Reconciling the cash balance per books with the cut-off bank statement and the bank confirmation. d. Inspecting title documents to verify whether any assets are pledged as collateral.
Explanation Choice "a" is correct. Confirming with third parties the details of arrangements to provide or "maintain (needed) financial support" is an audit procedure that may identify doubts about an entity's ability to continue as a going concern.
For a particular entity's financial statements to be presented fairly in conformity with the applicable financial reporting framework, it is not required that the principles selected: a. Be applied on a basis consistent with those followed in the prior year. b. Present information in the financial statements that is classified and summarized in a reasonable manner. c. Reflect transactions in a manner that presents the financial statements within a range of acceptable limits. d. Be appropriate in the circumstances for the particular entity.
Explanation Choice "a" is correct. For a particular entity's financial statements to be presented fairly in accordance with the applicable financial reporting framework, it is not required that the principles selected be applied on a basis consistent with those followed in the prior year, merely that any changes in accounting principle be properly accounted for and disclosed.
Which of the following provides the most authoritative guidance for the auditor of a non-issuer? a. General guidance provided by a Statement on Auditing Standards. b. A Journal of Accountancy article discussing implementation of a new standard. c. Specific guidance provided by an interpretation of a Statement on Auditing Standards. d. An AICPA audit and accounting guide that provides specific guidance with respect to the accounting practices in the client's industry.
Explanation Choice "a" is correct. General guidance provided by a Statement on Auditing Standards is the most authoritative of level of auditing guidance for audits of nonissuers. Auditors are required to comply with SASs, and should be prepared to justify any departures therefrom.
If a publicly held company issues financial statements that purport to present its financial position and results of operations but omits the statement of cash flows, the auditor ordinarily will express a(an): a. Qualified opinion. b. Unmodified opinion with an emphasis-of-matter paragraph. c. Disclaimer of opinion. d. Review report.
Explanation Choice "a" is correct. If a company issues financial statements that purport to present financial position and results of operations but omits the related statement of cash flows, the auditor will normally conclude that the omission requires qualification of the opinion.
If management (of a governmental body) declines to present supplementary information required by the Governmental Accounting Standards Board (GASB), the auditor should issue a(an): a. Unmodified opinion with an other-matter paragraph. b. Unmodified opinion. c. Qualified opinion with an emphasis-of-matter paragraph. d. Adverse opinion.
Explanation Choice "a" is correct. If management (of a governmental body) declines to present information required by the GASB, the auditor should issue an unmodified opinion with an other-matter paragraph.
An auditor who is unable to form an opinion on a new client's opening inventory balances may issue an unmodified opinion on the current year's: a. Balance sheet only. b. Statement of cash flows only. c. Income statement only. d. Statement of shareholders' equity only.
Explanation Choice "a" is correct. If the auditor is unable to form an opinion on a new client's opening inventory balances, the auditor will issue an opinion on the closing balance sheet only and will issue a disclaimer of opinion on the statements of income, retained earnings and cash flows.
Under which of the following circumstances would an auditor's expression of an unmodified opinion be inappropriate? a. The auditor is unable to obtain the audited financial statements of a significant subsidiary. b. There are significant deficiencies in the design and operation of the entity's internal control. c. The financial statements are prepared on the entity's income tax basis. d. Analytical procedures indicate that many year-end account balances are not comparable with the prior year's balances.
Explanation Choice "a" is correct. If the auditor is unable to obtain the audited financial statements of a significant subsidiary, a scope limitation exists. Assuming the effect is material, the auditor would issue either a qualified opinion or a disclaimer of opinion.
When an independent CPA assists in preparing the financial statements of a publicly held entity, but has not audited or reviewed them, the CPA should issue a disclaimer of opinion. In such situations, the CPA has no responsibility to apply any procedures beyond: a. Reading the financial statements for obvious material misstatements. b. Ascertaining whether the financial statements are in conformity with GAAP. c. Documenting that internal control is not being relied on. d. Determining whether management has elected to omit substantially all required disclosures.
Explanation Choice "a" is correct. The accountant is only required to read the financial statements for obvious material misstatements.
The adverse effects of events causing an auditor to believe there is substantial doubt about an entity's ability to continue as a going concern would most likely be mitigated by evidence relating to the: a. Marketability of assets that management plans to sell. b. Committed arrangements to convert preferred stock to long-term debt. c. Ability to expand operations into new product lines in the future. d. Feasibility of plans to purchase leased equipment at less than market value.
Explanation Choice "a" is correct. The adverse effects of events causing an auditor to believe there is a substantial doubt about an entity's ability to continue as a going concern would most likely be mitigated by evidence relating to the marketability of assets that management plans to sell. By providing evidence that there is a ready market for assets that could be converted to cash, management has demonstrated that the company could remain in operation for a longer period of time, thereby mitigating the need for an emphasis-of-matter paragraph describing the matter.
Management of Edgington Industries plans to disclose an uncertainty as follows: The Company is a defendant in a lawsuit alleging infringement of certain patent rights and claiming damages. Discovery proceedings are in progress. The ultimate outcome of the litigation cannot presently be determined. Accordingly, no provision for any liability that may result upon adjudication has been made in the accompanying financial statements. The auditor is satisfied that sufficient audit evidence supports management's assertions about the nature and disclosure of the uncertainty. What type of opinion should the auditor express under these circumstances under U.S. auditing standards? a. Unmodified without an emphasis-of-matter paragraph. b. Disclaimer of opinion. c. "Except for" qualified. d. Unmodified with an emphasis-of-matter paragraph.
Explanation Choice "a" is correct. The note presented describes an uncertainty that is properly disclosed. An emphasis-of-matter paragraph is not required in the unmodified opinion under U.S. auditing standards.
When an auditor expresses an adverse opinion, the opinion paragraph should include: a. A direct reference to a separate paragraph disclosing the basis for the opinion. b. A description of the uncertainty or scope limitation that prevents an unmodified opinion. c. The substantive reasons for the financial statements being misleading. d. The principal effects of the departure from generally accepted accounting principles.
Explanation Choice "a" is correct. The opinion paragraph in an adverse opinion should state that, in the auditor's opinion, because of the significance of the matter(s) described in the basis for adverse opinion paragraph, the financial statements are....
Which of the following statements is a basic element of the auditor's report under U.S. auditing standards? a. An audit includes evaluating significant estimates made by management. b. The disclosures provide reasonable assurance that the financial statements are free of material misstatement. c. The auditor evaluated the overall internal control. d. The financial statements are consistent with those of the prior period.
Explanation Choice "a" is correct. Under U.S. auditing standards, the auditor's audit report includes a statement that "An audit includes evaluating...significant estimates made by management..."
Which of the following is true? a. When a material accounting change has been properly accounted for and disclosed, the auditor may not issue an unmodified opinion. b. The auditor may issue an unmodified opinion when a material departure from GAAP exists. c. If an auditor believes there is substantial doubt about an entity's ability to continue as a going concern, and management has properly disclosed the situation, the auditor may not issue an unmodified opinion. d. When an auditor includes a paragraph after the opinion paragraph emphasizing a significant related party transaction, the opinion would be considered a qualified opinion.
Explanation Choice "b" is correct. Although this situation is unusual, if a departure from GAAP is justified, the auditor may issue an unmodified opinion with an emphasis-of-matter paragraph.
Digit Co. uses the FIFO method of costing for its international subsidiary's inventory and LIFO for its domestic inventory. Under these circumstances, the auditor's report on Digit's financial statements should express an: a. Adverse opinion. b. Unmodified opinion. c. Opinion qualified because of a departure from GAAP. d. Opinion qualified because of a lack of consistency.
Explanation Choice "b" is correct. GAAP allows a company to use different methods for costing different inventories as long as the methods are disclosed. Thus, the audit report would be unmodified; there is no departure from GAAP.
Which of the following best describes what is meant by the term generally accepted auditing standards? a. Rules acknowledged by the accounting profession because of their universal application. b. Measures of the quality of the auditor's performance. c. Pronouncements issued by the Auditing Standards Board. d. Procedures to be used to gather evidence to support financial statements.
Explanation Choice "b" is correct. Generally accepted auditing standards ("GAAS") are measures of the quality of the auditor's performance, and guide the auditor in the performance of a properly planned and executed audit
Under which of the following circumstances would the expression of a disclaimer of opinion be inappropriate? a. Management refuses to allow the auditor to have access to the company's canceled checks and bank statements. b. Management does not provide reasonable justification for a change in accounting principles. c. The company failed to make a count of its physical inventory during the year and the auditor was unable to apply alternative procedures to verify inventory quantities. d. The auditor is unable to obtain the audited financial statements of a consolidated investee.
Explanation Choice "b" is correct. If management does not provide reasonable justification for a change in accounting principles, the auditor would issue a qualified or adverse opinion, depending on materiality.
An auditor believes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. In evaluating the entity's plans for dealing with the adverse effects of future conditions and events, the auditor most likely would consider, as a mitigating factor, the entity's plans to: a. Repurchase the entity's stock at a price below its book value. b. Lease rather than purchase operating facilities. c. Issue stock options to key executives. d. Accelerate the due date of an existing mortgage.
Explanation Choice "b" is correct. Leasing rather than purchasing operating facilities results in reduced (or at least delayed) expenditures, which is a mitigating factor in a going concern situation.
An auditor most likely would issue a disclaimer of opinion because of: a. The omission of the statement of cash flows. b. Management's refusal to furnish written representations. c. A material departure from generally accepted accounting principles. d. Inadequate disclosure of material information.
Explanation Choice "b" is correct. Management's refusal to furnish written representations is a significant client imposed restriction on the scope of an audit, ordinarily warranting a disclaimer of opinion.
After considering an entity's negative trends and financial difficulties, an auditor has substantial doubt about the entity's ability to continue as a going concern. The auditor's considerations relating to management's plans for dealing with the adverse effects of these conditions most likely would include management's plans to: a. Purchase assets formerly leased. b. Increase ownership equity. c. Increase current dividend distributions. d. Reduce existing lines of credit.
Explanation Choice "b" is correct. The auditor considers any of management's plans that might serve to mitigate the adverse effects of particular conditions and events. Typically, plans to increase ownership equity, to borrow money, to restructure debt, to sell assets, and/or to reduce or delay expenditures might all be considered mitigating factors.
Which of the following is not an example of the application of professional skepticism? a. Designing additional auditing procedures to obtain more reliable evidence in support of a particular financial statement assertion. b. Inquiring of prior year engagement personnel regarding their assessment of management's honesty and integrity. c. Obtaining corroboration of management's explanations through consultation with a specialist. d. Using third party confirmations to provide support for management's representations.
Explanation Choice "b" is correct. The auditor should consider that fraud might occur regardless of any past experience with the entity. An assessment of management's honesty and integrity performed during the previous year would not necessarily be relevant to the current year's audit.
Under which of the following circumstances would a disclaimer of opinion not be appropriate? a. The auditor is unable to determine the amounts associated with an employee fraud scheme. b. The client refuses to permit the auditor to confirm certain accounts receivable or apply alternative procedures to verify their balances. c. Management does not provide reasonable justification for a change in accounting principle. d. The chief executive officer is unwilling to sign the management representation letter.
Explanation Choice "c" is correct. A disclaimer of opinion means that the auditor was unable to obtain sufficient appropriate audit evidence to provide a reasonable basis for an opinion, thus, no opinion is expressed. An unjustified change in accounting principle could result in a material misstatement of the financial statements that would result in a qualified or adverse opinion, not a disclaimer of opinion.
An auditor most likely would express an unmodified opinion and would not add emphasis-of-matter or other-matter paragraphs to the report if the auditor: a. Concurs with the entity's change in its method of computing depreciation. b. Discovers that supplementary information required by FASB has been omitted. c. Believes that there is a probable likelihood of a material loss resulting from an uncertainty that is sufficiently supported and disclosed. d. Wishes to emphasize that the entity had significant transactions with related parties.
Explanation Choice "c" is correct. An auditor most likely would express an unmodified opinion and would not add an additional paragraph to the report if the auditor believes that there is a probable likelihood of a material loss resulting from an uncertainty that is sufficiently supported and disclosed.
In which of the following situations would an auditor ordinarily choose between expressing an "except for" qualified opinion or an adverse opinion? a. The auditor is asked to report only on the entity's balance sheet and not on the other basic financial statements. b. The auditor did not observe the entity's physical inventory and is unable to become satisfied as to its balance by other auditing procedures. c. The financial statements fail to disclose information that is required by generally accepted accounting principles. 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.
Explanation Choice "c" is correct. Failure to disclose information that is required by GAAP is a departure from GAAP. Departures from GAAP result in a qualified or an adverse opinion
Jewel, CPA, audited Infinite Co.'s prior-year financial statements. These statements are presented with those of the current year for comparative purposes without Jewel's auditor's report, which expressed a qualified opinion. In drafting the current year's auditor's report, Crain, CPA, the successor auditor, should: I. Not name Jewel as the predecessor auditor. II. Indicate the type of report issued by Jewel. III. Indicate the substantive reasons for Jewel's qualification. a. II and III only. b. I and II only. c. I, II, and III. d. I only.
Explanation Choice "c" is correct. If the financial statements of a prior period have been audited by a predecessor auditor whose report is not presented, the successor auditor should indicate in an Other-Matter paragraph of the report 1) that the financial statements of the prior period were audited by another auditor, 2) the date of the previous report, 3) the type of report issued by the predecessor auditor, and 4) if the report was other than an unmodified report, the substantive reasons therefor. The successor auditor may name the predecessor auditor only if the predecessor auditor's practice was acquired by or merged with that of the successor auditor.
When an auditor has substantial doubt about an entity's ability to continue as a going concern because of the probable discontinuance of operations, the auditor most likely would express a qualified opinion if: a. Negative trends and recurring operating losses appear to be irreversible. b. The effects of the adverse financial conditions likely will cause a bankruptcy filing. c. Information about the entity's ability to continue as a going concern is not disclosed. d. Management has no plans to reduce or delay future expenditures.
Explanation Choice "c" is correct. In a situation where it is likely that an entity's operations will be discontinued, disclosure of information about the entity's ability to continue as a going concern is required by GAAP. Failure to make such disclosure would be a departure from GAAP, resulting in either a qualified or adverse opinion.
Tech Company has disclosed an uncertainty due to pending litigation. The auditor's decision to issue a qualified opinion rather than an unmodified opinion most likely would be determined by the: a. Entity's lack of experience with such litigation. b. Inability to estimate the amount of loss. c. Lack of sufficient evidence. d. Lack of insurance coverage for possible losses from such litigation.
Explanation Choice "c" is correct. Lack of sufficient evidence to support management's assertions would most likely cause an auditor to issue a qualified or disclaimer of opinion.
The financial statements of KCP America, a U.S. entity, are prepared for inclusion in the consolidated financial statements of its non-U.S. parent. These financial statements are prepared in conformity with a financial reporting framework generally accepted in the parent's country and are for use only in that country. How may KCP America's auditor report on these financial statements? I. A U.S.-style report (unmodified). II. A U.S.-style report modified to report on the financial reporting framework of the parent's country. III. The report form of the parent's country. a. Yes No No b. No Yes No c. No Yes Yes d. Yes No Yes
Explanation Choice "c" is correct. No - Yes - Yes. When financial statements are prepared in accordance with a financial reporting framework generally accepted in the parent's country and are for use only in that country, the auditor may report using either a U.S.-style report modified to report on the financial reporting framework of the parent's country or the report form of the parent's country.
Which of the following procedures would an auditor most likely perform prior to the balance sheet date? a. Perform search for unrecorded liabilities. b. Review subsequent events. c. Review detail and test significant travel and entertainment expenses. d. Send inquiry letter to client's legal counsel.
Explanation Choice "c" is correct. The auditor may choose to perform detailed audit work during an interim period prior to the balance sheet date, especially for accounts that are reasonably predictable. If travel and entertainment expenses are budgeted and closely monitored, they may very well be predictable and subject to interim testing.
In which of the following paragraphs of an auditor's report does an auditor communicate the nature of the engagement and the specific financial statements covered by the audit? a. Opinion paragraph. b. Emphasis-of-matter paragraph. c. Introductory paragraph. d. Scope paragraph.
Explanation Choice "c" is correct. The introductory paragraph indicates the nature of the engagement (i.e., audit), the financial statements covered in the (audit) engagement, the name of the entity whose financial statements have been audited, and the dates covered by each financial statement.
When an entity changes its method of accounting for income taxes, which has a material effect on comparability, the auditor should refer to the change in an emphasis-of-matter paragraph added to the auditor's report. This paragraph should identify the nature of the change and: a. State the auditor's explicit concurrence with or opposition to the change. b. Explain why the change is justified under generally accepted accounting principles. c. Refer to the financial statement note that discusses the change in detail. d. Describe the cumulative effect of the change on the audited financial statements.
Explanation Choice "c" is correct. The paragraph should refer to the note in the financial statements that discusses the change in detail. Following is an example of an appropriate emphasis-of-matter paragraph: "As discussed in Note X to the financial statements, the company changed its method of accounting for income taxes in X2."
For an entity's financial statements to be presented fairly in accordance with an applicable financial reporting framework, the framework selected should: a. Match the reporting framework used by most other entities within the entity's particular industry. b. Be U.S. GAAP, for all audits performed in the United States. c. Include an adequate description of the framework in the financial statements. d. Be approved by the Auditing Standards Board or the appropriate industry subcommittee.
Explanation Choice "c" is correct. The preparation and fair presentation of the financial statements requires identification of the applicable financial reporting framework and inclusion of an adequate description of the framework, as well as preparation and fair presentation in accordance with the framework.
An auditor decides to issue a qualified opinion on an entity's financial statements because a major inadequacy in its computerized accounting records prevents the auditor from applying necessary procedures. The opinion paragraph of the auditor's report should state that the qualification pertains to: a. A client-imposed scope limitation. b. A departure from generally accepted auditing standards. c. The possible effects on the financial statements. d. Inadequate disclosure of necessary information.
Explanation Choice "c" is correct. When an auditor qualifies his opinion because of a scope limitation, the wording in the opinion paragraph should indicate that the qualification pertains to the possible effects on the financial statements and not to the scope limitation itself.
In certain audit engagements, the auditor may be required to comply with auditing requirements in addition to GAAS. The auditor may conduct the audit in accordance with: a. Either GAAS as issued by the AICPA or PCAOB Standards, but not both. b. International Standards on Auditing, but only if the audit is being conducted in another country outside the U.S.A. c. Both GAAS and government auditing standards (GAGAS) d. Only GAAS or PCAOB, but not auditing standards of another jurisdiction or country.
Explanation Choice "c" is correct. While GAAS do not override laws or regulations that govern an audit of financial statements, an audit may be conducted in accordance with two sets of auditing standards in their entirety. In this case, the auditor should add additional language to the Auditor's Responsibility paragraph to state that the audit was conducted in accordance with both sets of auditing standards.
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, the audit report may include a(an): Disclaimer of opinion "Except for" qualified opinion a. No No b. No Yes c. Yes No d. Yes Yes
Explanation Choice "c" is correct. Yes - No. If an auditor concludes that there is substantial doubt about an entity's ability to continue as a going concern and that the entity's disclosures are adequate, then the audit report may be either: • Unmodified with emphasis-of-matter paragraph, or • Disclaimed.
An auditor's report under U.S. auditing standards that refers to the use of an accounting principle at variance with generally accepted accounting principles contains the words, "In our opinion, with the foregoing explanation, the financial statements referred to above present fairly...." This is considered an: a. "Except for" qualified opinion. b. Adverse opinion. c. Unmodified opinion with an emphasis-of-matter paragraph. d. Example of inappropriate reporting.
Explanation Choice "d" is correct. "In our opinion, with the foregoing explanation, the FS referred to above present fairly" is an example of inappropriate reporting. When an auditor's report refers to the use of an accounting principle at variance with GAAP, the words, "in our
If an accounting change has no material effect on the financial statements in the current year, but the change is reasonably certain to have a material effect in later years, the change should be: a. Disclosed in the notes to the financial statements and referred to in the auditor's report for the current year. b. Treated as a subsequent event. c. Treated as a consistency modification in the auditor's report for the current year. d. Disclosed in the notes to the financial statements of the current year.
Explanation Choice "d" is correct. If an accounting change does not have a material effect on the FS of the current year, it will be disclosed in the notes to the FS for the current year, but no modification of the auditor's report is necessary.
On February 9, Brown, CPA, expressed an unmodified opinion on the financial statements of Web Co. On October 9, during a peer review of Brown's practice, the reviewer informed Brown that engagement personnel failed to perform a search for subsequent events for the Web engagement. Brown should first: a. Request Web's permission to perform substantive procedures that would provide a satisfactory basis for the opinion. b. Inquire of Web whether there are persons currently relying, or likely to rely, on the financial statements. c. Take no additional action because subsequent events have no effect on the financial statements that were reported on. d. Assess the importance of the omitted procedures to Brown's present ability to support the opinion.
Explanation Choice "d" is correct. If an omitted audit procedure is discovered, the auditor should assess the importance of the omitted procedure to the auditor's ability to support the opinion. It might be the case that other audit procedures tended to compensate for the omitted procedure, in which case no further action would be necessary. Choice "a" is incorrect. The auditor would only request permission to perform substantive procedures if no other procedures compensated for the missing one, and if there were persons relying (or likely to rely) on the financial statements. Choice "b" is incorrect. The auditor would need to determine whether there were persons relying (or likely to rely) on the financial statements, but this would not be done unless it had already been determined that no other audit procedures compensated for the missing one.
In which of the following circumstances would an auditor most likely add an emphasis-of-matter paragraph to the report while not affecting the auditor's unmodified opinion? a. The auditor is asked to report on the balance sheet, but not on the other basic financial statements. b. Certain transactions cannot be tested because of management's records retention policy. c. Management's estimates of the effects of future events are unreasonable. d. There is substantial doubt about the entity's ability to continue as a going concern.
Explanation Choice "d" is correct. If, after considering identified conditions and events and management's plans, the auditor concludes that substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time remains, the audit report should include an emphasis-of-matter paragraph to reflect that conclusion.
In which of the following situations would an auditor ordinarily choose between expressing a qualified opinion or an adverse opinion? a. The auditor did not observe the entity's physical inventory and is unable to become satisfied about its balance by other auditing procedures. b. The auditor is unable to apply necessary procedures concerning an investor's share of an investee's earnings recognized on the equity method. c. There has been a change in accounting principles that has a material effect on the comparability of the entity's financial statements. d. Conditions that cause the auditor to have substantial doubt about the entity's ability to continue as a going concern are inadequately disclosed.
Explanation Choice "d" is correct. 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.
Which of the following phrases should be included in the opinion paragraph when an auditor expresses a qualified opinion? 1) When read in conjunction with Note X 2) With the foregoing explanation a. No Yes b. Yes No c. Yes Yes d. No No
Explanation Choice "d" is correct. No − No. A qualified opinion phrase is, "in our opinion, except for [explanation of problem] as discussed in the preceding paragraph . . ."
In the first audit of a new client, an auditor was able to extend auditing procedures to gather sufficient evidence about consistency. Under these circumstances, the auditor should: a. State that the accounting principles have been applied consistently. b. Not report on the client's income statement. c. State that the consistency standard does not apply. d. Not refer to consistency in the auditor's report.
Explanation Choice "d" is correct. The auditor's standard report implies that the auditor is satisfied that the comparability of financial statements between periods has not been materially affected by changes in accounting principles and that such principles have been consistently applied between or among periods. Since the auditor has gathered sufficient evidence about consistency, no reference need be made in the report.
March, CPA, is engaged by Monday Corp., a client, to audit the financial statements of Wall Corp., a company that is not March's client. Monday expects to present Wall's audited financial statements with March's auditor's report to 1st Federal Bank to obtain financing in Monday's attempt to purchase Wall. In these circumstances, March's auditor's report would usually be addressed to: a. 1st Federal Bank. b. Wall Corp., the entity audited by March. c. Both Monday Corp. and 1st Federal Bank. d. Monday Corp., the client that engaged March.
Explanation Choice "d" is correct. The auditors should address their report to the entity that engaged them. In this case, Monday Corp. engaged the auditor to perform an acquisition audit and the report should be addressed to Monday.
In which of the following circumstances would an auditor not express an unmodified opinion? a. The auditor wishes to emphasize an unusually important subsequent event. b. There has been a material change between periods in accounting principles. c. Quarterly financial data required by the SEC has been omitted. d. The auditor is unable to obtain audited financial statements of a consolidated investee.
Explanation Choice "d" is correct. The inability to obtain audited financial statements of a consolidated investee represents a scope limitation which may result in either a qualified opinion or a disclaimer of opinion.
In connection with a proposal to obtain a new client, an accountant in public practice is asked to prepare a written report on the application of the requirements of an applicable financial reporting framework to a specific transaction. The accountant's report should include a statement that: a. The engagement was performed in accordance with Statements on Standards for Consulting Services. b. Nothing came to the accountant's attention that caused the accountant to believe that the financial reporting framework violated GAAP. c. The guidance provided is for management use only and may not be communicated to the prior or continuing auditors. d. Any difference in the facts, circumstances, or assumptions presented may change the report.
Explanation Choice "d" is correct. The reporting accountant's report on the application of the requirements of an applicable financial reporting framework should include a statement that should any facts or circumstances differ from those presented to the reporting accountant, the accountant's report may change.
Subsequent to the issuance of an 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. Give public notice that the auditor is no longer associated with financial statements. b. Issue revised pro forma financial statements taking into consideration the newly discovered information. c. Request that management disclose the newly discovered information by issuing revised financial statements. d. Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information.
Explanation Choice "d" is correct. When subsequently discovered information is found both to be reliable and to have existed at the date of the auditor's report, the auditor should determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information.
