Audit Final - Chapter 16 & 17
If financial statements fail to disclose a material fact, the auditors may disclose the information in an explanatory paragraph and issue an unqualified opinion on the statements.
F
Internal control over payroll is enhanced when the personnel department distributes payroll checks
F
The Miscellaneous Revenue account should only be analyzed if it is material in amount.
F
The auditors have a responsibility to report on all FASB-required supplementary information.
F
When the auditors are unable to comply with generally accepted auditing standards, they should issue an opinion that is unqualified, but include an additional explanatory paragraph in the report.
F
A public company's financial statements should be prepared following standards of the Public Company Accounting Oversight Board.
F
Audit reports should be dated the date on which the financial statements are issued
F
Common to future purchase commitments is the fact that they should be recorded as liabilities at discounted values as of year-end.
F
Dual dating of an audit report extends the auditors' liability for disclosure through the later date for all areas of the financial statements.
F
A client has changed the salvage values of a number of its fixed assets. The auditors believe that the salvage values are realistic. The appropriate report on the financial statements is: A. Standard unqualified. B. Unqualified with explanatory language as to consistency. C. Qualified for consistency. D. Disclaimer.
A. Standard unqualified.
Which of the following statements ordinarily is not included among the written client representations made by the chief executive officer and the chief financial officer? A. "Sufficient audit evidence has been made available to the auditor to permit the issuance of an unqualified opinion." B. "There are no unasserted claims or assessments that our lawyer has advised us are probable of assertion and must be disclosed." C. "We have no plans or intentions that may materially affect the carrying value or classification of assets and liabilities." D. "No events have occurred subsequent to the balance sheet date that would require adjustment to, or disclosure in, the financial statements."
A. "Sufficient audit evidence has been made available to the auditor to permit the issuance of an unqualified opinion."
Management estimates the company's allowance for doubtful accounts as $200,000, and the auditors develop an estimate that suggests that the amount should be between $230,000 and $250,000. The known misstatement in this situation is: A. $0 B. $30,000 C. $40,000 D. $50,000
A. $0
An audit client has refused to allow the auditors to perform a generally accepted auditing procedure. The circumstance would normally result in the issuance of: A. A disclaimer of opinion. B. An adverse opinion. C. An "except for" qualification of the report. D. An unqualified report with explanatory language
A. A disclaimer of opinion.
Doe, an independent auditor, was engaged to perform an audit of the financial statements of Ally Incorporated one month after its fiscal year had ended. Although the inventory count was not observed by Doe, and accounts receivable were not confirmed by direct communication with debtors, Doe was able to gain satisfaction by applying alternative auditing procedures. Doe's audit report will probably contain: A. A standard unqualified opinion. B. An unqualified opinion and an explanatory paragraph. C. Either a qualified opinion or a disclaimer of opinion. D. An "except for" qualification.
A. A standard unqualified opinion.
Which of the following is not explicitly included in an audit report for a nonpublic company? A. A statement that he auditor believes that his or her audit provides a reasonable basis for expressing negative assurance. B. A statement that the auditor's responsibility is to express an opinion on the financial statements. C. A statement that the financial statements in the report are the responsibility of management. D. A title with the word "independent."
A. A statement that he auditor believes that his or her audit provides a reasonable basis for expressing negative assurance.
Which of the following audit procedures is aimed at determining whether every name on the company payroll is an employee actually on the job? A. A surprise observation of a paycheck distribution. B. A test of payroll extensions. C. Analytical comparisons of budgeted to actual payroll expense. D. Comparison of payee names on canceled payroll checks with the payroll register.
A. A surprise observation of a paycheck distribution.
If, after issuing an audit report, the auditors find that they have failed to perform certain significant audit procedures they should first: A. Attempt to determine whether their report is still being relied upon by third parties. B. Notify regulatory agencies. C. Notify legal counsel. D. Wait until the beginning of the next year's audit to determine whether misstatements have occurred.
A. Attempt to determine whether their report is still being relied upon by third parties.
The audit of which of the following balance sheet accounts does not normally result in verification of an income statement account? A. Cash. B. Accounts receivable. C. Property, plant and equipment. D. Intangible assets.
A. Cash.
Which of the following is the best reason why the auditors should consider observing a client's distribution of regular payroll checks? A. Separation of payroll duties is less than adequate for effective internal control. B. Total payroll costs are a significant part of total operating costs. C. The auditors did not observe the distribution of the entire regular payroll during the audit in the prior year. D. Employee turnover is excessive.
A. Separation of payroll duties is less than adequate for effective internal control.
Which of the following circumstances generally results in the issuance of a report that is other than unqualified? A. Circumstances have significantly limited the scope of the auditors' procedures. B. The principal auditors for the engagement are relying on the work of other auditors. C. The financial statements depart from a standard established by the FASB because the auditors have concluded that application of the standard would result in materially misleading financial statements. D. The auditors have decided to emphasize the fact that the company has engaged in material amounts of related party transactions.
A. Circumstances have significantly limited the scope of the auditors' procedures.
An example of an internal control weakness is to assign the personnel department responsibility for: A. Distribution of paychecks. B. Hiring personnel. C. Authorizing deductions from pay. D. Interviewing employees for jobs.
A. Distribution of paychecks.
The Rotter Company changed accounting principles in 20X4 from those followed in 20X3. The auditor believes that the new principles are not in conformity with GAAP, and therefore that the 20X4 financial statements are misleading. The change (including its dollar effect) has been described in the notes to the 20X4 statements, which are being presented by themselves. Under these circumstances, in reporting on the 20X4 financial statements, the auditor should: A. Express an adverse opinion with an explanatory paragraph disclosing the reason (the accounting change) for the opinion. B. Express an unqualified opinion with an explanatory paragraph and disclose the accounting change from 20X3 and its effect on the financial statements. C. Disclaim an opinion and explain all of the reasons therefore. D. Express an adverse opinion regarding the 20X4 financial statements, without an explanatory paragraph disclosing the reason therefore since it will be included in the notes to the statements.
A. Express an adverse opinion with an explanatory paragraph disclosing the reason (the accounting change) for the opinion.
An auditor's decision concerning whether or not to "dual date" the audit report is based upon the auditor's willingness to: A. Extend auditing procedures. B. Accept responsibility for year-end adjusting entries. C. Permit inclusion of a note captioned: event (unaudited) subsequent to the date of the auditor's report. D. Assume responsibility for resolving all events subsequent to the issuance of the auditor's report.
A. Extend auditing procedures.
Which of the following types of matters do not generally require disclosure in the financial statements? A. General risk contingencies. B. Commitments. C. Loss contingencies. D. Liabilities to related parties.
A. General risk contingencies.
The first paragraph of a standard unqualified audit report for a nonpublic client is referred to as the: A. Introductory paragraph. B. Scope paragraph. C. Opinion paragraph. D. Explanatory paragraph.
A. Introductory paragraph.
The auditors include explanatory language in an otherwise unqualified report in order to emphasize that the entity being reported upon is a subsidiary of another business enterprise. The inclusion of this explanatory language: A. Is appropriate and would not negate the unqualified opinion. B. Is considered a qualification of the report. C. Is a violation of generally accepted reporting standards if this information is disclosed in notes to the financial statements. D. Necessitates a revision of the opinion paragraph to include the phrase "with the foregoing explanation."
A. Is appropriate and would not negate the unqualified opinion.
Which of the following best describes the reference to the expression "taken as a whole" in the fourth generally accepted auditing standard of reporting? A. It applies equally to a complete set of financial statements and to each individual financial statement. B. It applies only to a complete set of financial statements. C. It applies equally to each item in each financial statement. D. It applies equally to each material item in each financial statement.
A. It applies equally to a complete set of financial statements and to each individual financial statement.
The auditor's primary means of obtaining corroboration of management's information concerning litigation is a: A. Letter of audit inquiry to the client's lawyer. B. Letter of corroboration from the auditor's lawyer upon review of the legal documentation. C. Confirmation of claims and assessments from the other parties to the litigation. D. Confirmation of claims and assessments from an officer of the court presiding over the litigation.
A. Letter of audit inquiry to the client's lawyer.
The auditors' primary means of obtaining corroboration of management's information concerning litigation is a: A. Letter of audit inquiry to the client's lawyer. B. Letter of corroboration from the auditor's lawyer upon review of the legal documentation. C. Confirmation of claims and assessments from the other parties to the litigation. D. Confirmation of claims and assessments from an officer of the court presiding over the litigation.
A. Letter of audit inquiry to the client's lawyer.
If the principal auditor decides to make reference to the other auditor's audit, the introductory paragraph must specifically indicate the: A. Magnitude of the portion of the financial statements examined by the other auditor. B. Name of the other auditor. C. Name of the consolidated subsidiary examined by the other auditor. D. Type of opinion expressed by the other auditor.
A. Magnitude of the portion of the financial statements examined by the other auditor.
An auditor has been asked to report on the balance sheet of Kane Company but not on the other basic financial statements. The auditor will have access to all information underlying the basic financial statements. Under these circumstances, the auditor: A. May accept the engagement because such engagements merely involve limited reporting objectives. B. May accept the engagement but should disclaim an opinion because of an inability to apply the procedures considered necessary. C. Should refuse the engagement because there is a client-imposed scope limitation. D. Should refuse the engagement because of a departure from generally accepted auditing standards.
A. May accept the engagement because such engagements merely involve limited reporting objectives.
Which of the following procedures is not a procedure that is completed near the end of the engagement? A. Review cash transactions. B. Review to identify subsequent events. C. Obtain the lawyer's letter. D. Obtain the letter of representations.
A. Review cash transactions.
Auditors must communicate internal control "significant deficiencies" to: A. The audit committee. B. The shareholders. C. The SEC. D. The Federal Trade Commission.
A. The audit committee.
The principal auditor is satisfied with the independence and professional reputation of the other auditor who has audited a subsidiary. To indicate the division of responsibility, the principal auditor should modify: A. The introductory, scope, and opinion paragraphs of the report. B. Only the scope paragraph of the report. C. Only the opinion paragraph of the report. D. Only the opinion paragraph of the report and include an explanatory paragraph.
A. The introductory, scope, and opinion paragraphs of the report.
Which of the following would be most likely to be an appropriate addressee for an audit report? A. The shareholders of the corporation whose financial statements were examined. B. A third party who requested that a copy of the audit report be sent to her. C. The president of the corporation whose financial statements were examined. D. The chief financial officer.
A. The shareholders of the corporation whose financial statements were examined.
In which of the following circumstances would an auditor of financial statements be most likely to express an adverse opinion? A. The statements are not in conformity with the FASB Statements regarding the capitalization of leases. B. Information comes to the auditor's attention that raises substantial doubt about the entity's ability to continue in existence. C. The chief executive officer refuses the auditor access to minutes of board of directors' meetings. D. Tests of controls show that the entity's internal control is so poor that it can not be relied upon.
A. The statements are not in conformity with the FASB Statements regarding the capitalization of leases.
56. An independent auditor has concluded that a substantial doubt remains about a client's ability to continue as a going concern, but the client's financial statements have properly disclosed all of its solvency problems. The auditor would probably issue a(an): A. Unqualified opinion with an appropriate explanatory paragraph. B. "Except for" qualified opinion. C. Standard unqualified opinion. D. Adverse opinion.
A. Unqualified opinion with an appropriate explanatory paragraph.
Shortly after year-end Zero Corporation was informed of the bankruptcy of Bingo. Zero Corporation showed a receivable of $10,000 due from Bingo as of year-end—none of which seems recoverable. The receivable had been questionable for some time as Bingo had been experiencing financial difficulties for the past several years. Yet, Bingo's bankruptcy did not occur until after Zero Corporation's year-end. Under these circumstances: The financial statements should be adjusted Yes/No The event requires financial statements should be disclosed but no adjustment needed Yes/No The auditors report should be modified for a lack of consistency. A. Yes, No, No B. Yes, No, Yes C. No, Yes, Yes D. No, Yes, No
A. Yes, No, No
Which of the following will not result in qualification of the auditors' report due to a scope limitation? A. Restrictions imposed by the client. B. Reliance placed upon the report of other auditors. C. Inability to obtain sufficient competent evidential matter. D. Inadequacy in the accounting records.
B. Reliance placed upon the report of other auditors.
Management estimates the company's allowance for doubtful accounts as $200,000, and the auditors develop an estimate that suggests that the amount should be between $230,000 and $250,000. The likely misstatement in this situation is: A. $0 B. $30,000 C. $40,000 D. $50,000
B. $30,000
A client's previous two years financial statements understated estimated warranty payable by $30,000 and $50,000 respectively, immaterial amounts. This year the auditors estimate that the accrual is understated by an additional $60,000. In this year's audit $55,000 represents a material amount. Assuming that the entire understatement is to be recorded, following SEC SAB 108 the decrease in this year's income due to these understatements is: A. $0 B. $60,000 C. $110,000 D. $140,000
B. $60,000
Which of the following will result in explanatory language as to consistency in the auditor's report, regardless of whether the item is fully disclosed in the financial statements? A. A change in accounting estimate. B. A change from an unacceptable accounting principle to a generally accepted one. C. Correction of an error not involving a change in accounting principle. D. A change in classification.
B. A change from an unacceptable accounting principle to a generally accepted one.
An auditor's report on comparative financial statements should be dated as of the date of the: A. Issuance of the report. B. Accumulation of sufficient appropriate audit evidence. C. Latest financial statements being reported on. D. Last related-party transaction disclosed in the statements.
B. Accumulation of sufficient appropriate audit evidence.
Which of the following is not a procedure that is designed to provide evidence about the existence of loss contingencies? A. Obtaining a lawyers' letter. B. Confirming accounts payable. C. Reviewing the minutes of board of directors' meetings. D. Review correspondence with banks.
B. Confirming accounts payable.
When the auditor is unable to determine the amounts associated with the illegal acts of client personnel because of an inability to obtain adequate evidence, the auditor should issue a(an): A. "Subject to" qualified opinion. B. Disclaimer of opinion. C. Adverse opinion. D. Unqualified opinion with a separate explanatory paragraph.
B. Disclaimer of opinion.
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. Referred to in the auditor's report for the current year. B. Disclosed in the notes to the financial statements of the current year. C. Disclosed in the notes to the financial statements and referred to in the auditor's report for the current year. D. Treated as a subsequent event.
B. Disclosed in the notes to the financial statements of the current year.
A CPA reviews a client's payroll procedures. The CPA would consider internal control to be less than effective if a payroll department supervisor was assigned the responsibility for: A. Reviewing and approving time reports for subordinate employees. B. Distributing payroll checks to employees. C. Hiring subordinate employees. D. Initiating requests for salary adjustments for subordinate employees.
B. Distributing payroll checks to employees.
Which of the following is a "registration statement" that is filed with the SEC by a company planning to issue securities to the public? A. Form 8-K. B. Form S-1. C. Form 10-Q. D. Form 10-K.
B. Form S-1.
CPA Firm A has performed most of the audit of Consolidated Company's financial statements and qualifies as the principal auditor. CPA Firm B did the remainder of the work. Firm A wishes to assume full responsibility for Firm B's work. Which of the following statements is correct? A. Such assumption of responsibility violates the profession's standards. B. In such circumstances, when appropriate requirements have been met, Firm A should issue a standard unqualified opinion on the financial statements. C. In such circumstances, when appropriate requirements have been met, Firm A should issue an unqualified opinion on the financial statements but should make appropriate reference to Firm B in the audit report. D. CPA firm A should normally qualify its audit report on the basis of the scope limitation involved when another CPA firm is involved.
B. In such circumstances, when appropriate requirements have been met, Firm A should issue a standard unqualified opinion on the financial statements.
When an auditor of financial statements 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. The effects of the adverse financial conditions likely will cause a bankruptcy filing. B. Information about the entity's ability to continue as a going concern is not disclosed. C. Management has no plans to reduce or delay future expenditures. D. Negative trends and recurring operating losses appear to be irreversible.
B. Information about the entity's ability to continue as a going concern is not disclosed.
An approach that quantifies the total likely misstatement as of the current year-end based on the effects of reflecting all misstatements existing in the balance sheet at the end of the current year, irrespective of whether the misstatements occurred in the current or previous years is referred to as the: A. Evaluation materiality approach. B. Iron curtain approach. C. Projected misstatement approach. D. Rollover approach.
B. Iron curtain approach.
When an auditor of financial statements does not confirm material accounts receivable, but is satisfied by the application of alternative auditing procedures, she normally should: A. Issue an unqualified opinion, but disclose elsewhere in the report this departure from a customary procedure. B. Issue an unqualified opinion with no reference to this omission but be prepared to defend the action. C. Issue a qualified opinion or a disclaimer, depending on the materiality of the receivables. D. Issue an adverse opinion.
B. Issue an unqualified opinion with no reference to this omission but be prepared to defend the action.
Specific misstatement in one of a client's 2,000 accounts receivable is referred to as a(n): A. Extrapolation difference. B. Known misstatement. C. Likely misstatement. D. Projected misstatement.
B. Known misstatement.
. It is not appropriate for the auditors' report to refer a reader to a financial statement note for details regarding a(an): A. Change in accounting principle. B. Limitation in the scope of the audit. C. Uncertainty. D. Related party transaction.
B. Limitation in the scope of the audit.
With respect to issuance of an audit report which is dual dated for a subsequent event occurring after the completion of field work but before issuance of the auditors' report, the auditors' responsibility for events occurring subsequent to the completion of field work is: A. Extended to include all events occurring until the date of the last subsequent event referred to. B. Limited to the specific event referred to. C. Limited to all events occurring through the date of issuance of the report. D. Extended to include all events occurring through the date of submission of the report to the client.
B. Limited to the specific event referred to.
Which of the following subsequent events might require an adjustment to the client's financial statements? A. A business combination with another company. B. Loss on the sale of a closely-held investment. C. Loss of plant and equipment due to a fire. D. Retirement of bonds payable at a loss.
B. Loss on the sale of a closely-held investment.
The fourth reporting standard requires the auditor's report to contain either an expression of opinion regarding the financial statements, taken as a whole, or an assertion to the effect that an opinion cannot be expressed. The objective of the fourth standard is to prevent: A. The CPA from reporting on one basic financial statement and not the others. B. Misinterpretations regarding the degree of responsibility that the auditor is assuming. C. The CPA from expressing different opinions on each of the basic financial statements. D. Management from reducing its final responsibility for the basic financial statements.
B. Misinterpretations regarding the degree of responsibility that the auditor is assuming.
When auditing the statement of cash flows of a profitable, growing company which combination is most likely? Cash flows from operations Positive/Negative? Cash flows from investing Positive/Negation? A. Positive - Positive B. Positive - Negative C. Negative - Positive D. Negative - Negative
B. Positive - Negative
An explanatory paragraph relating to a scope limitation in the audit of the financial statements of a nonpublic company should be placed A. After the opinion paragraph. B. Prior to the opinion paragraph. C. Either before or after the opinion paragraph. D. An audit report modified for a scope limitation does not include an explanatory paragraph.
B. Prior to the opinion paragraph.
When a client declines to disclose essential information in the financial statements or notes, the auditor of the financial statements should: A. Provide the information in the audit report, if practicable, and qualify the opinion because of a limitation on the scope of the audit. B. Provide the information in the audit report, if practicable, and qualify the opinion because of a departure from GAAP. C. Issue a disclaimer of opinion because the client has interfered with the auditor's function of assessing the adequacy of disclosure. D. Issue an unqualified opinion, but inform the reader by including the omitted information in the audit report.
B. Provide the information in the audit report, if practicable, and qualify the opinion because of a departure from GAAP.
A refusal by a lawyer to furnish information related to litigation included in the letter of inquiry is likely to result in: A. Confirmation of related lawsuits with the claimants. B. Qualification of the audit report. C. An assessment that loss of the litigation is probable. D. An adverse opinion.
B. Qualification of the audit report.
A limitation on the scope of the audit sufficient to preclude an unqualified opinion will always result when management: A. Asks the auditor to report on the balance sheet and not on the other basic financial statements. B. Refuses to permit its lawyer to respond to the letter of audit inquiry. C. Discloses material related party transactions in the notes to the financial statements. D. Knows that confirmation of accounts receivable is not feasible.
B. Refuses to permit its lawyer to respond to the letter of audit inquiry.
Which of the following is least likely to result in explanatory language being added to an unqualified auditor's report on the financial statements of a client that sells jewelry through a retail store? A. A decision by the auditor to emphasize that the client is a part of a larger organization. B. Reliance placed upon a specialist to evaluate the diamonds. C. A change from FIFO to specific identification accounting for inventory. D. A question as to whether the client will be able to remain a going concern.
B. Reliance placed upon a specialist to evaluate the diamonds.
The unqualified standard audit report of a nonpublic company does not explicitly state that: A. The financial statements are the responsibility of the company's management. B. The audit was conducted in accordance with accounting principles generally accepted in the United States of America. C. The auditors believe that the audit provides a reasonable basis for their opinion. D. An audit includes assessing the accounting principles used.
B. The audit was conducted in accordance with accounting principles generally accepted in the United States of America.
If audited financial statements include a balance sheet and an income statement, but do not include a statement of cash flows: A. The auditors may still issue an unqualified opinion. B. The auditors should issue an "except for" qualification for the departure from generally accepted accounting principles. C. The auditors should issue an opinion "subject to" the information that would have been contained in the statement of cash flows. D. The auditors should refuse to issue an opinion on only the two financial statements.
B. The auditors should issue an "except for" qualification for the departure from generally accepted accounting principles.
The management of Stanley Corporation has decided not to account for a material transaction in accordance with the provisions of a recent statement of the FASB. They have set forth their reasons in note "B" of the financial statements, which clearly demonstrates that due to unusual circumstances the financial statements would otherwise have been misleading. The auditors' report on the financial statements will probably contain a(an): A. Qualified opinion and an explanatory paragraph with a reference to note "B". B. Unqualified opinion and an explanatory paragraph. C. Adverse opinion and an explanatory paragraph. D. "Except for" opinion and an explanatory paragraph.
B. Unqualified opinion and an explanatory paragraph.
Which of the following accounting changes requires explanatory language regarding consistency in the auditors' report? A. A change in the estimated useful lives of a class of fixed assets. B. A write-off of a patent because future benefits do not appear to exist. C. A change from the straight line method of depreciation to an accelerated method for a class of fixed assets. D. A change in calculating bad debt expense from one percent to two percent of credit sales.
C. A change from the straight line method of depreciation to an accelerated method for a class of fixed assets.
When an adverse opinion is expressed, the opinion paragraph should include a direct reference to: A. A note to the financial statements which discusses the basis for the opinion. B. The scope paragraph which discusses the basis for the opinion rendered. C. A separate paragraph which discusses the basis for the opinion rendered. D. The consistency in the application of generally accepted accounting principles.
C. A separate paragraph which discusses the basis for the opinion rendered.
A scope restriction is least likely to result in a(an): A. Qualified opinion. B. Disclaimer of opinion. C. Adverse opinion. D. Standard unqualified opinion.
C. Adverse opinion.
If principal auditors make no reference to other auditors whose work they have relied on as a part of the basis for their report, the principal auditors: A. Are not required to investigate the professional reputation of the other auditors. B. Are issuing an inappropriate report. C. Are assuming full responsibility for the work of the other auditors. D. Are issuing a qualified opinion.
C. Are assuming full responsibility for the work of the other auditors.
An example of an internal control weakness is to assign the payroll department the responsibility for: A. Preparing the payroll expense distribution. B. Preparing the payroll checks. C. Authorizing increases in pay. D. Preparing journal entries for payroll expense.
C. Authorizing increases in pay.
Which of the following is most accurate with respect to a CPA's responsibility in considering a going concern question on financial statement audits? A. Perform analytical procedures aimed particularly at assessing whether bankruptcy is probable. B. Issue a report with a "going concern" modification when failure is at least reasonably probable. C. Based on audit procedures performed, assess whether there is substantial doubt about the entity's ability to continue as a going concern. D. Determine that related uncertainties are properly disclosed and make no mention in the audit report.
C. Based on audit procedures performed, assess whether there is substantial doubt about the entity's ability to continue as a going concern.
To minimize the opportunities for fraud, unclaimed cash payroll should be: A. Deposited in a safe deposit box. B. Held by the payroll custodian. C. Deposited in a special bank account. D. Held by the controller.
C. Deposited in a special bank account.
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. Increase current dividend distributions. B. Reduce existing lines of credit. C. Increase ownership equity. D. Purchase assets formerly leased.
C. Increase ownership equity.
Which of the following information must be reported on in the auditors' report? A. FASB-required supplementary information. B. Other information in client-prepared documents. C. Information accompanying financial statements in auditor-submitted documents. D. GASB-required supplementary information.
C. Information accompanying financial statements in auditor-submitted documents.
When financial statements are affected by a material departure from generally accepted accounting principles, the auditors should: A. Issue an unqualified report with an explanatory paragraph. B. Withdraw from the engagement. C. Issue an "except for" qualification or an adverse opinion. D. Issue an "except for" qualification or a disclaimer of opinion.
C. Issue an "except for" qualification or an adverse opinion.
In evaluating whether there is a sufficiently low probability of material misstatement in the financial statements, the auditors accumulate: A. Likely misstatements in the financial statements. B. Known misstatements in the financial statements. C. Known, projected and other estimated misstatements in the financial statements. D. Known, projected and potential misstatements in the financial statements.
C. Known, projected and other estimated misstatements in the financial statements.
An auditor of financial statements 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. Issue stock options to key executives. C. Lease rather than purchase operating facilities. D. Accelerate the due date of an existing mortgage.
C. Lease rather than purchase operating facilities.
Morgan, CPA, is the principal auditor for a multinational corporation. Another CPA has examined and reported on the financial statements of a significant subsidiary of the corporation. Morgan is satisfied with the independence and professional reputation of the other auditor, as well as the quality of the other auditor's audit. With respect to Morgan's report on the consolidated financial statements, taken as a whole, Morgan: A. Must not refer to the audit of the other CPA. B. Must refer to the audit of the other CPA. C. May refer to the audit of the other CPA. D. May refer to the audit of the other CPA, in which case Morgan must include in the audit report on the consolidated financial statements a qualified opinion with respect to the audit of the other CPA.
C. May refer to the audit of the other CPA.
The review of audit working papers by the audit partner is normally completed: A. Prior to year-end. B. Immediately as each working paper is completed. C. Near the completion of field work. D. After issuance of the audit report, but prior to required subsequent event review procedures.
C. Near the completion of field work.
When the auditor of a nonpublic company issues an adverse opinion an explanatory paragraph is added. In addition, which, if any, paragraphs to the report are modified? Introductory Yes/No Scope Yes/No Opinion Yes/No A. Yes,No,Yes B. No,Yes,Yes C. No,No,Yes D. No,No,No
C. No,No,Yes
When an auditor issues a qualified report on financial statements due to a scope limitation an explanatory paragraph is added. In addition, which, if any, paragraphs to the report are modified? Introductory Yes/No Scope Yes/No Opinion Yes/No A. Yes,Yes,No B. Yes,No,Yes C. No,Yes,Yes D. No,Yes,No
C. No,Yes,Yes
Which of the following auditing procedures is ordinarily performed last? A. Reading of the minutes of the directors' meetings. B. Confirming accounts payable. C. Obtaining a management representation letter. D. Testing of the purchasing function.
C. Obtaining a management representation letter.
Analytical procedures are required as a part of the A. Detailed tests of balances B. Internal control assessment. C. Overall review at the conclusion of the audit. D. Substantive testing.
C. Overall review at the conclusion of the audit.
It would be appropriate for the payroll accounting department to be responsible for which of the following functions? A. Approval of employee time records. B. Maintenance of records of employment, discharges, and pay increases. C. Preparation of periodic governmental reports as to employees' earnings and withholding taxes. D. Distribution of paychecks to employees.
C. Preparation of periodic governmental reports as to employees' earnings and withholding taxes.
The date the auditor grants the client permission to use the audit report in connection with the financial statements is the: A. Last day of significant field work. B. Report cutoff date. C. Report release date. D. Representation date.
C. Report release date.
In auditing the balance sheet, most revenue and expense accounts are also audited. Which accounts are most likely to be audited when auditing Accounts Receivable? A. Sales and Cost of Goods Sold. B. Interest and Bad Debt Expense. C. Sales and Bad Debt Expense. D. Interest and Cost of Goods Sold.
C. Sales and Bad Debt Expense.
Which of the following statements is correct with respect to explanatory paragraphs in reports on audits of the financial statements of nonpublic companies? A. They always precede the opinion paragraph. B. They always follow the opinion paragraph. C. Sometimes they precede and sometimes they follow the opinion paragraph. D. They always precede the scope paragraph.
C. Sometimes they precede and sometimes they follow the opinion paragraph.
Which of the following modifications of the auditors' report does not include an additional paragraph? A. The report is qualified because the financial statements contain a material departure from generally accepted accounting principles. B. The report includes an emphasis of a matter. C. The audit report indicates a division of responsibility between two CPA firms. D. The report is qualified because the scope of the auditors' work was restricted.
C. The audit report indicates a division of responsibility between two CPA firms.
Which of the following is not a difference between the audit report of a nonpublic and public company? A. The nonpublic company report includes the word "Registered" in the title. B. The nonpublic company report refers to standards of the PCAOB. C. The nonpublic company report has an additional paragraph referring to the client's fraud prevention procedures. D. The nonpublic company report must include the city and state in which the report has been issued.
C. The nonpublic company report has an additional paragraph referring to the client's fraud prevention procedures.
In which of the following circumstances would an adverse opinion be appropriate? A. The auditor is not independent with respect to the enterprise being audited. B. The statements are not in conformity with generally accepted accounting principles because they omit a statement of changes in financial position. C. The statements are not in conformity with generally accepted accounting principles regarding pension plans. D. A client-imposed scope limitation prevents the auditor from complying with generally accepted auditing standards.
C. The statements are not in conformity with generally accepted accounting principles regarding pension plans.
Auditors should perform audit procedures relating to subsequent events? A. Through year end. B. Through issuance of the audit report. C. Through the last day of field work. D. For a reasonable period after year end.
C. Through the last day of field work.
In the course of the audit of financial statements for the purpose of expressing an opinion thereon, the auditors will normally prepare a schedule of unadjusted differences for which the auditors did not propose adjustment when they were identified. What is the primary purpose served by this schedule? A. To point out to the responsible client officials the errors made by various company personnel. B. To summarize the adjustments that must be made before the company can prepare and submit its federal tax return. C. To identify the potential financial statement effects of misstatement or disputed items that were considered immaterial when discovered. D. To summarize the misstatements made by the company so that corrections can be made after the audited financial statements are released.
C. To identify the potential financial statement effects of misstatement or disputed items that were considered immaterial when discovered.
Which of the following ledger accounts would be least likely to be analyzed in detail by auditors? A. Miscellaneous revenue. B. Professional fees. C. Travel expense. D. Repairs and maintenance.
C. Travel expense.
The term "except for" in an audit report is: A. Used in an adverse opinion. B. No longer considered appropriate. C. Used in a qualified opinion D. Used for an unqualified opinion when an explanatory paragraph is added.
C. Used in a qualified opinion
A client's previous two years of financial statements understated estimated warranty payable by $30,000 and $50,000 respectively, immaterial amounts. This year the auditors estimate that the accrual is understated by an additional $60,000. In this year's audit $100,000 represents a material amount. Assuming that the entire understatement is to be recorded, following SEC SAB 108 the decrease in this year's income due to these understatements is: A. $0 B. $60,000 C. $110,000 D. $140,000
D. $140,000
For a particular entity's financial statements to be presented fairly in conformity with generally accepted accounting principles, it is not required that the principles selected: A. Be appropriate in the circumstances for the particular entity. B. Reflect transactions in a manner that presents the financial statements within a range of acceptable limits. C. Present information in the financial statements that is classified and summarized in a reasonable manner. D. Be applied on a basis consistent with those followed in the prior year.
D. Be applied on a basis consistent with those followed in the prior year.
Which of the following is an analytical procedure that should be applied to the income statement? A. Select sales and expense items and trace amounts to related supporting documents. B. Ascertain that the net income amount in the statement of cash flows agrees with the net income amount in the income statement. C. Obtain from the proper client representatives, the beginning and ending inventory amounts that were used to determine costs of sales. D. Compare the actual revenues and expenses with the corresponding figures of the previous year and investigate significant differences.
D. Compare the actual revenues and expenses with the corresponding figures of the previous year and investigate significant differences.
When an auditor has concluded there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time beyond the current financial statement date (9/30/X1), the auditor's responsibility includes: A. Preparing prospective financial information to verify whether management's plans can be effectively implemented. B. Projecting conditions and events from one year prior to this year's date (9/30/X0) to 9/30/X1. C. Issuing an adverse or negative assurance opinion, depending upon materiality, due to the possible effects on the financial statements. D. Considering the adequacy of disclosure about the entity's possible inability to continue as a going concern.
D. Considering the adequacy of disclosure about the entity's possible inability to continue as a going concern.
55. Auditors often request that the audit client send a letter of inquiry to those attorneys who have been consulted with respect to litigation, claims, or assessments. The primary reason for this request is to provide the auditors with: A. An estimate of the dollar amount of the probable loss. B. An expert opinion as to whether a loss is possible, probable or remote. C. Information concerning the progress of cases to date. D. Corroborative audit evidence.
D. Corroborative audit evidence.
Which of the following procedures would an auditor most likely perform while evaluating audit findings at the conclusion of an audit? A. Obtain assurance from the entity's attorney that all material litigation has been disclosed in the financial statements. B. Verify the clerical accuracy of the entity's proof of cash and its bank cutoff statement. C. Determine whether reportable conditions have corrected. D. Develop an estimate of the total likely misstatement in the financial statements.
D. Develop an estimate of the total likely misstatement in the financial statements.
For a continuing audit client, when a complete set of financial statements is presented on a comparative basis for two years, the auditors' opinion would refer to: A. Only the current year under audit. B. Either one or both years at the option of the auditors. C. Each of the two years plus the preceding year. D. Each of the years in the two-year period.
D. Each of the years in the two-year period.
A common audit procedure in the audit of payroll transactions involves tracing selected items from the payroll journal to employee time cards that have been approved by supervisory personnel. This procedure is designed to provide evidence in support of the audit proposition that: A. Only bona fide employees worked and their pay was properly computed. B. Jobs on which employees worked were charged with the appropriate labor cost. C. Internal control relating to payroll disbursements are operating effectively. D. Employees worked the number of hours for which their pay was computed.
D. Employees worked the number of hours for which their pay was computed.
Which of the following representations does an auditor make explicitly and which implicitly when issuing an unqualified opinion on public company financial statements? Conformity with PCAOB Standards - explicitly/Implicitly Adequacy of Disclosure - explicitly/Implicitly A. Explicitly,Explicitly B. Implicitly,Implicitly C. Implicitly,Explicitly D. Explicitly,Implicitly
D. Explicitly,Implicitly
An auditor will ordinarily examine invoices from lawyers primarily in order to: A. Substantiate accruals. B. Assess the legal ramifications of litigation in progress. C. Estimate the dollar amount of contingent liabilities. D. Identify possible unasserted litigation, claims and assessments.
D. Identify possible unasserted litigation, claims and assessments.
The statement that best expresses the auditor's responsibility with respect to events occurring between the balance sheet date and the end of his audit is that: A. The auditor has no responsibility for events occurring in the subsequent period unless these events affect transactions recorded on or before the balance sheet date. B. The auditor's responsibility is to determine that a proper cutoff has been made and that transactions recorded on or before the balance sheet date actually occurred. C. The auditor is fully responsible for events occurring in the subsequent period and should extend all detailed procedures through the last day of field work. D. The auditor is responsible for determining that a proper cutoff has been made and performing a general review of events occurring in the subsequent period.
D. The auditor is responsible for determining that a proper cutoff has been made and performing a general review of events occurring in the subsequent period.
Material loss contingencies should be recorded in the financial statements if available information indicates it is probable that a loss had been sustained prior to the balance sheet date and the amount of such loss can be reasonably estimated. These considerations will affect the audit report as follows: A. If a loss has been recorded in accordance with these criteria, the auditor may issue an unqualified opinion but is required to point out the contingency in an explanatory paragraph of the report. B. If a loss meets these criteria but is disclosed in the financial statement notes rather than being recorded therein, the auditor may issue an unqualified opinion, but is required to point out the contingency in an explanatory paragraph of the report. C. If a loss meets these criteria but is disclosed in the financial statement notes rather than being recorded therein, the auditor may issue an unqualified opinion, but should consider adding an explanatory paragraph as a means of emphasizing the disclosure. D. If a loss is probable but the amount cannot be reasonably estimated and is disclosed in the notes to the financial statements rather than being recorded therein, the auditor may issue an unqualified opinion.
D. If a loss is probable but the amount cannot be reasonably estimated and is disclosed in the notes to the financial statements rather than being recorded therein, the auditor may issue an unqualified opinion.
Which of the following 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. Performing cutoff tests of sales transactions with customers with long-standing receivable balances. B. Evaluating the entity's procedures for identifying and recording related party transactions. C. Inspecting title documents to verify whether any real property is pledged as collateral. D. Inquiring of the entity's legal counsel about litigation, claims, and assessments.
D. Inquiring of the entity's legal counsel about litigation, claims, and assessments.
To which of the following matters would materiality limits not apply when obtaining written client representations? A. Violations of state labor regulations. B. Disclosure of line-of-credit arrangements. C. Information about related party transactions. D. Instances of fraud involving management.
D. Instances of fraud involving management.
When an auditor issues an unqualified report on financial statements, but adds an emphasis of a matter paragraph to the report, which, if any, paragraphs to the report are modified? Introductory Yes/No Scope Yes/No Opinion Yes/No A. Yes,Yes,Yes B. No,Yes,Yes C. No,No,Yes D. No,No,No
D. No,No,No
Which of the following is not a procedure normally performed while completing the audit? A. Obtain a lawyer's letter. B. Obtain a representations letter. C. Perform an overall review using analytical procedures. D. Obtain confirmation of capital stockholdings from shareholders.
D. Obtain confirmation of capital stockholdings from shareholders.
The auditors' best course of action with respect to "other financial information" included in a client prepared annual report containing the auditors' report is to: A. Indicate in the auditors' report, that the "other financial information" is unaudited. B. Consider whether the "other financial information" is accurate by performing a limited review. C. Obtain written representations from managements as to the material accuracy of the "other financial information." D. Read and consider the manner of presentation of the "other financial information."
D. Read and consider the manner of presentation of the "other financial information."
If the predecessor auditors fail to reissue their audit report on comparative financial statements the successor auditors should: A. Express a qualified opinion on the comparative financial statements audited by the predecessor auditors. B. Reproduce the predecessor auditors' report and include it with the new set of financial statements. C. Have the client omit the comparative financial statements. D. Refer to the report of the predecessor auditors.
D. Refer to the report of the predecessor auditors.
Which of the following is not a procedure that auditors typically perform to search for significant events during the subsequent period? A. Review minutes of board of directors' meeting. B. Review the latest available interim financial statements. C. Inquire about any unusual adjustments made subsequent to the balance sheet date. D. Review changes in internal control during the period subsequent to the balance sheet date.
D. Review changes in internal control during the period subsequent to the balance sheet date.
An approach that quantifies the total likely misstatement as of the current year-end based on the effects of reflecting misstatements during the current year (and not considering any unadjusted previous year misstatements) is referred to as the: A. Evaluation materiality approach. B. Iron curtain approach. C. Projected misstatement approach. D. Rollover approach.
D. Rollover approach.
The purpose of segregating the duties of distributing payroll checks and hiring personnel is to: A. Separate the custody of assets from the accounting for those assets. B. Establish clear lines of authority and responsibility. C. Separate duties within the accounting function. D. Separate the authorization of transactions from the custody of related assets.
D. Separate the authorization of transactions from the custody of related assets.
Which of the following material events occurring subsequent to the balance sheet date would require an adjustment to the financial statements before they could be issued? A. Sale of long-term debt or capital stock. B. Loss of a plant as a result of a flood. C. Major purchase of a business which is expected to double the sales volume. D. Settlement of litigation in excess of the recorded liability.
D. Settlement of litigation in excess of the recorded liability.
A "very material" change from one generally accepted accounting principle to another generally accepted accounting principle usually results in an adverse opinion by the auditors
F
When reporting on comparative financial statements where the financial statements of the prior period have been examined by a predecessor auditor whose report is not presented, the successor auditor should indicate in the report: A. The reasons why the predecessor auditor's report is not presented. B. The identity of the predecessor auditor who examined the financial statements of the prior year. C. Whether the predecessor auditor's review of the current year's financial statements revealed any matter that might have a material effect on the successor auditor's opinion. D. The type of opinion expressed by the predecessor auditor.
D. The type of opinion expressed by the predecessor auditor.
Under which of the following set of circumstances might the auditors disclaim an opinion? A. The financial statements contain a departure from generally accepted accounting principles, the effect of which is material. B. The principal auditors decide to make reference to the report of another auditor who audited a subsidiary. C. There has been a material change between periods in the method of application of accounting principles. D. There are significant scope limitations on the audit.
D. There are significant scope limitations on the audit.
Which of the following is not correct relating to representation letters? A. They are ordinarily dated as of the date of the audit report. B. They are signed by members of top management. C. They must be obtained for audits. D. They often serve as a substitute for the application of other procedures.
D. They often serve as a substitute for the application of other procedures.
One reason why the independent auditors perform analytical procedures on the client's operations is to identify: A. Weaknesses of a material nature in internal control. B. Non-compliance with prescribed control procedures. C. Improper separation of accounting and other financial duties. D. Unusual transactions.
D. Unusual transactions.
When financial statements of a prior period are presented on a comparative basis with financial statements of the current period, the continuing auditor is responsible for: A. Expressing dual dated opinions. B. Updating the report on the previous financial statements only if there has not been a change in the opinion. C. Updating the report on the previous financial statements only if the previous report was qualified and the reasons for the qualification no longer exist. D. Updating the report on the previous financial statements regardless of the opinion previously issued.
D. Updating the report on the previous financial statements regardless of the opinion previously issued.
After performing all necessary procedures the predecessor auditors reissue a prior-period report on financial statements at the request of the client without revising the original wording. The predecessor auditors should: A. Delete the date of the report. B. Dual-date the report. C. Use the reissue date. D. Use the date of the previous report.
D. Use the date of the previous report.
Authorization of which of the following is least likely to be found during a review of the minutes of the board of directors? A. Dividends. B. New debt issuance. C. New bank accounts. D. Writeoff of trade accounts receivable.
D. Writeoff of trade accounts receivable.
A client imposed scope limitation will generally result in a disclaimer of opinion.
T
Analytical procedures are often used for verification of income statement accounts
T
If financial statements contain a material departure from generally accepted accounting principles, the auditors usually should not issue an unqualified opinion.
T
If management fails to list an unasserted claim in the letter of inquiry to a lawyer, the lawyer is not required to inform the auditors of the omission.
T
If not adjusted, a situation in which the total likely misstatement in the financial statements exceeds a material amount is likely to lead to an audit report modification.
T
Normally, general risk contingencies need not be disclosed in the financial statements.
T
Regulation S-X governs the form and content of financial statements filed with the SEC
T
Subsequent events that provide additional evidence as to conditions that existed at the balance sheet date may result in adjusting journal entries.
T
When evaluating the results of audit tests, materiality depends upon both the dollar amount and the nature of the item.
T
When there is a significant question about a company's ability to remain a going concern, the report issued is usually unqualified with an explanatory paragraph.
T