Chapter 3 Audit and Assurance

22) Indicate which changes would require an explanatory paragraph in the audit report. A) A departure from GAAP which, due to unusual circumstances, does not require a qualified or adverse opinion. The CPA makes reference to the work of another auditor to indicate shared responsibility in an unqualified opinion. Yes Yes B) A departure from GAAP which, due to unusual circumstances, does not require a qualified or adverse opinion. The CPA makes reference to the work of another auditor to indicate shared responsibility in an unqualified opinion. No No C) A departure from GAAP which, due to unusual circumstances, does not require a qualified or adverse opinion. The CPA makes reference to the work of another auditor to indicate shared responsibility in an unqualified opinion. Yes No D) A departure from GAAP which, due to unusual circumstances, does not require a qualified or adverse opinion. The CPA makes reference to the work of another auditor to indicate shared responsibility in an unqualified opinion. No Yes

answer: C Terms: Changes that would require an explanatory paragraph in audit report Diff: Challenging Objective: LO 3-4

13) Whenever the client imposes restrictions on the scope of the audit, the auditor should be concerned that management may be trying to prevent discovery of misstatements. In such cases, the auditor will likely issue a: A) disclaimer of opinion in all cases. B) qualification of both scope and opinion in all cases. C) disclaimer of opinion whenever materiality is in question. D) qualification of both scope and opinion whenever materiality is in question.

answer: C Terms: Client imposed restrictions on scope of audit Diff: Moderate Objective: LO 3-5

18) Which of the following requires recognition in the auditor's opinion as to consistency? A) The correction of an error in the prior year's financial statements resulting from a mathematical mistake in capitalizing interest. B) A change in the estimate of provisions for warranty costs. C) The change from the cost method to the equity method of accounting for investments in common stock. D) A change in depreciation method which has no effect on current year's financial statements but is certain to affect future years.

answer: C Terms: Consistency Diff: Challenging Objective: LO 3-4

12) For the report containing a disclaimer for lack of independence, the disclaimer is in the: A) third or opinion paragraph. B) second or scope paragraph. C) first and only paragraph. D) fourth or explanatory paragraph.

answer: C Terms: Disclaimer in which report paragraph Diff: Challenging Objective: LO 3-7

11) Items that materially affect the comparability of financial statements generally require disclosure in the footnotes. If the client refuses to properly disclose the item, the auditor will most likely issue: A) a disclaimer. B) an unqualified opinion. C) a qualified opinion. D) an adverse opinion.

answer: C Terms: Disclosure and comparability Diff: Moderate Objective: LO 3-5

14) Which of the following is true concerning financial statements issued by a U.S. entity to the Securities and Exchange Commission? A) Financial statements can be prepared using International Financial Reporting Standards. B) The United States now allows an auditor to perform an audit of financial statements of a U.S. entity in accordance with both GAAS and International Audit Standards. C) The United States only allows an auditor to perform an audit of financial statement of an entity in accordance with GAAS if they are using International Financial Reporting Standards. D) An audit that uses both the GAAS and International Audit standards must modify the scope paragraph to include both sets of standards.

answer: C Terms: Financial statements issued by U.S. entity to Securities and Exchange Commission Diff: Challenging Objective: LO 3-1

5) A four paragraph auditor opinion is required when: A) Qualified opinion due to scope restriction Disclaimer due to a scope restriction Yes Yes B) Qualified opinion due to scope restriction Disclaimer due to a scope restriction No No C) Qualified opinion due to scope restriction Disclaimer due to a scope restriction Yes No D) Qualified opinion due to scope restriction Disclaimer due to a scope restriction No Yes

answer: C Terms: Four paragraph auditor opinion Diff: Challenging Objective: LO 3-8

7) A four paragraph auditor opinion is required for: A) An unjustified accounting change A justified accounting change, properly accounted for Yes Yes B) An unjustified accounting change A justified accounting change, properly accounted for No No C) An unjustified accounting change A justified accounting change, properly accounted for Yes No D) An unjustified accounting change A justified accounting change, properly accounted for No Yes

answer: C Terms: Four paragraph auditor opinion Diff: Challenging Objective: LO 3-8

11) Which of the following statements are true? I. The introductory paragraph states that management is responsible for the preparation and content of the financial statements. II. The scope paragraph states that the auditor evaluates the appropriateness of those accounting principles, estimates, and financial statement disclosures. A) I only B) II only C) I and II D) Neither I nor II

answer: C Terms: Introductory paragraph and scope paragraph Diff: Moderate Objective: LO 3-1

10) The introductory paragraph of the standard audit report performs which functions? I. State the CPA has performed an audit. II. Lists the financials being audited. III. States the financials are the responsibility of the auditor. A) I and II B) I and III C) II and III D) I, II and III

answer: C Terms: Introductory paragraph of standard audit report Diff: Moderate Objective: LO 3-1

12) The introductory paragraph of the standard audit report states that the auditor is: A) responsible for the financial statements and the opinion on them. B) responsible for the financial statements. C) responsible for the opinion on the financial statements. D) jointly responsible for the financial statements with management.

answer: C Terms: Introductory paragraph of standard audit report Diff: Moderate Objective: LO 3-1

14) After the balance sheet date but prior to issuance of the auditor's report the auditor learns that the client's facility in a foreign country has been expropriated. Management refuses to disclose this information in a financial statement footnote or present pro-forma data as to the effect of the event. The auditor should: A) add a footnote to the financial statements B) disclaim an opinion due to the client imposed scope limitation. C) provide the information in the report and modify the opinion. D) issue an unqualified opinion but provide the information in the auditor report.

answer: C Terms: Material subsequent event management refusal to disclose Diff: Challenging Objective: LO 3-1 and LO 3-7

5) Materiality is an essential consideration in determining the appropriate type of report under a given set of circumstances. Which of the following is not considered an immaterial instance that would not cause the financials to become qualified? A) Immediately expensing office supplies rather than inventorying them. B) Recording prepaid insurance as an asset in the prior year and expensing it in the current year. C) A misstatement in property, plant and equipment affects a user's decision. D) All of the above are immaterial.

answer: C Terms: Materialityquailifications Diff: Moderate Objective: LO 3-6

2) Which of the following statements is not true? A) A one-paragraph report is generally used when the auditor is not independent. B) A three-paragraph report ordinarily indicates there are no exceptions in the audit. C) More than three paragraphs in the report indicates there must be some type of qualification in the audit. D) An unqualified opinion with an explanation or modified wording would require more than three paragraphs.

answer: C Terms: Number of paragraphs in the audit report Diff: Challenging Objective: LO 3-8

12) Which of the following scenarios does not result in a qualified opinion? A) A scope limitation prevents the auditor from completing an important audit procedure. B) The auditor's report refers to the work of a specialist. C) The auditor lacks independence with respect to the audited entity. D) An accounting principle at variance with GAAP is used.

answer: C Terms: Qualified opinion Diff: Moderate Objective: LO 3-5

5) The independent auditor must issue a qualified opinion when which of the financial(s) are missing? I. Balance Sheet II. Income Statement III. Statement of Cash Flows A) I only B) II only C) III only D) I, II, and III

answer: C Terms: Qualified opinion issued when which financial statement is missing Diff: Moderate Objective: LO 3-7

3) An auditor can express a qualified opinion due to a: A) Departure from GAAP Lack of Consistency Lack of Sufficient Evidence Yes No No B) Departure from GAAP Lack of Consistency Lack of Sufficient Evidence No Yes No C) Departure from GAAP Lack of Consistency Lack of Sufficient Evidence Yes No Yes D) Departure from GAAP Lack of Consistency Lack of Sufficient Evidence Yes Yes Yes

answer: C Terms: Qualified opinions Diff: Easy Objective: LO 3-5

4) Which of the following is not a cause for a modification of the format for a standard unqualified auditor's report? A) Substantial doubt about an entity's ability to continue as a going concern. B) Reports involving other auditors. C) A departure from promulgated accounting principles. D) Not consistently applying accounting principles.

answer: C Terms: Report modifications Diff: Moderate Objective: LO 3-4

10) William Gregory, CPA, is the principal auditor for a multi-national corporation. Another CPA has examined and reported on the financial statements of a significant subsidiary of the corporation. Gregory is satisfied with the independence and professional reputation of the other auditor, as well as the quality of the other auditor's examination. With respect to his report on the consolidated financial statements, taken as a whole, Gregory: A) must not refer to the examination of the other auditor. B) must refer to the examination of the other auditor. C) may refer to the examination of the other auditor. D) must refer to the examination of the other auditors along with the percentage off consolidated assets and revenue that they audited.

answer: C Terms: Reports involving other auditors Diff: Moderate Objective: LO 3-4

7) Which of the following is incorrect concerning scope limitations? A) If client imposed the auditor should be concerned about client trying to prevent discovery of a material misstatement. B) An unqualified opinion can result if auditors can perform alternative procedures and are satisfied that the information is fairly stated. C) The most common circumstance imposed scope restriction is due to the client changing their auditors. D) The most common circumstance imposed scope limitation is when the auditor is appointed after the balance sheet date.

answer: C Terms: Scope limitation Diff: Moderate Objective: LO 3-7

2) A CPA may wish to emphasize specific matters regarding the financial statements even though an unqualified opinion will be issued. Normally, such explanatory information is: A) included in the scope paragraph. B) included in the opinion paragraph. C) included in a separate paragraph in the report. D) included in the introductory paragraph.

answer: C Terms: Unqualified opinion with emphasis on specific matters regarding the financial statements Diff: Easy Objective: LO 3-4

2) An adverse opinion is issued when the auditor believes: A) some parts of the financial statements are materially misstated or misleading. B) the financial statements would be found to be materially misstated if an investigation were performed. C) the auditor is not independent. D) the overall financial statements are so materially misstated that they do not present fairly the financial position or results of operations and cash flows in conformity with GAAP.

answer: D Terms: Adverse opinion Diff: Easy Objective: LO 3-5

1) An audit of historical financial statements most commonly includes the: A) balance sheet, statement of retained earnings, and the statement of cash flows. B) income statement, the statement of cash flows, and the statement of net working capital. C) statement of cash flows, balance sheet, and the statement of retained earnings. D) balance sheet, income statement, and the statement of cash flows.

answer: D Terms: Audit of historical financial statements Diff: Moderate Objective: LO 3-1

10) What type of audit opinion does the independent auditor issue when the following financial statements are not presented? A) Balance Sheet Income Statement Statement of Cash Flows Qualified Qualified Qualified B) Balance Sheet Income Statement Statement of Cash Flows Disclaimer Disclaimer Qualified C) Balance Sheet Income Statement Statement of Cash Flows Adverse Adverse Adverse D) Balance Sheet Income Statement Statement of Cash Flows Adverse Adverse Qualified

answer: D Terms: Audit opinion issued when financial statements are not presented Diff: Challenging Objective: LO 3-7

5) The audit report date on a standard unqualified report indicates: A) the last day of the fiscal period. B) the date on which the financial statements were filed with the Securities and Exchange Commission. C) the last date on which users may institute a lawsuit against either client or auditor. D) the last day of the auditor's responsibility for the review of significant events that occurred subsequent to the date of the financial statements.

answer: D Terms: Audit report date on standard unqualified report Diff: Easy Objective: LO 3-1

1) As a result of management's refusal to permit the auditor to physically examine inventory. The auditor must depart from the unqualified audit report because: A) the financial statements have not been prepared in accordance with GAAP. B) the scope of the audit has been restricted by circumstances beyond either the client's or auditor's control. C) the financial statements have not been audited in accordance with GAAS. D) the scope of the audit has been restricted.

answer: D Terms: Auditor must depart from unqualified audit report; Management refusal to permit the auditor to physically examine inventory Diff: Easy Objective: LO 3-5

10) When a client has changed their method of valuing inventory from FIFO to LIFO and the change has a material effect on the financial statements. If the auditor does not concur with the appropriateness of the change, the auditor should issue a(n): A) disclaimer. B) adverse opinion. C) unqualified opinion. D) qualified opinion.

answer: D Terms: Change in valuing inventory and auditor does not concur with change Diff: Moderate Objective: LO 3-5

5) Which of the following are changes that affect the comparability of financial statements but not the consistency and therefore, do not have to be included in the auditor's report? A) Error corrections not involving principles B) Changes in accounting estimates C) Variations in the format and presentation of financial information D) All of the above.

answer: D Terms: Changes that affect the comparability of financial statements Diff: Moderate Objective: LO 3-4

6) When a client fails to follow GAAP, the audit can be unqualified, qualified, or adverse depending on the materiality. What factors affect materiality that an auditor should consider? A) The dollar amount in comparison to a base. B) If the misstatement can be measured. C) The nature of the item. D) All the above are factors an auditor should consider regarding materiality.

answer: D Terms: Client fails to follow GAAP; Materiality Diff: Moderate Objective: LO 3-6

11) A company has changed its method of inventory valuation from an unacceptable one to one in conformity with generally accepted accounting principles. The auditor's report on the financial statements of the year of the change should include: A) no reference to consistency. B) a reference to a prior period adjustment in the opinion paragraph. C) an explanatory paragraph that justifies the change and explains the impact of the change on reported net income. D) an explanatory paragraph explaining the change.

answer: D Terms: Consistency modifications Diff: Moderate Objective: LO 3-4

9) When a disclaimer is issued because the auditor lacks independence: A) no report title is included on the report. B) a one-paragraph audit report is issued. C) the only reason cited for issuing the disclaimer is the lack of independence. D) all of the above are correct.

answer: D Terms: Disclaimer issued if auditor lacks independence Diff: Moderate Objective: LO 3-5

15) Which of the following statements is true? I. The auditor is required to issue a disclaimer of opinion in the event of a material uncertainty. II. The auditor is required to issue a disclaimer of opinion in the event of a going concern problem. A) I only B) II only C) I and II D) Neither I nor II

answer: D Terms: Disclaimer of opinion Diff: Challenging Objective: LO 3-5

7) When the auditor cannot perform procedures and the amounts are so material that a disclaimer of opinion is required, the: A) opinion paragraph will state "does not present fairly." B) opinion paragraph will state "presents fairly." C) scope paragraph will be unchanged from the standard unqualified opinion. D) scope paragraph will be deleted.

answer: D Terms: Disclaimer of opinion Diff: Challenging Objective: LO 3-6

8) If the auditor lacks independence, a disclaimer of opinion must be issued: A) if the client requests it. B) only if it is highly material. C) only if it is material but not pervasive. D) in all cases.

answer: D Terms: Disclaimer when auditor lacks independence Diff: Moderate Objective: LO 3-5

4) A four paragraph auditor opinion is required when: A) Unqualified opinion indicating shared responsibility with another auditor Unqualified opinion expressing substantial doubt that the company is a going concern Yes Yes B) Unqualified opinion indicating shared responsibility with another auditor Unqualified opinion expressing substantial doubt that the company is a going concern No No C) Unqualified opinion indicating shared responsibility with another auditor Unqualified opinion expressing substantial doubt that the company is a going concern Yes No D) Unqualified opinion indicating shared responsibility with another auditor Unqualified opinion expressing substantial doubt that the company is a going concern No Yes

answer: D Terms: Four paragraph auditor opinion Diff: Challenging Objective: LO 3-8

17) When the client fails to make adequate disclosure in the body of the statements or in the related footnotes, it is the responsibility of the auditor to: A) inform the reader that disclosure is not adequate, and to issue an adverse opinion. B) inform the reader that disclosure is not adequate, and to issue a qualified opinion. C) present the information in the audit report and issue an unqualified or qualified opinion. D) present the information in the audit report and to issue a qualified or an adverse opinion.

answer: D Terms: Inadequate disclosure Diff: Challenging Objective: LO 3-5

16) In which of the following situations would the auditor most likely issue an unqualified report? A) The client valued ending inventory by using the replacement cost method. B) The client valued ending inventory by using the Next-In-First-Out (NIFO) method. C) The client valued ending inventory at selling price rather than historical cost. D) The client valued ending inventory by using the First-In-First-Out (FIFO) method, but showed the replacement cost of inventory in the Notes to the Financial Statements.

answer: D Terms: Issuance of unqualified report Diff: Challenging Objective: LO 3-1

2) Misstatements must be compared with some measurement base before a decision can be made about materiality. A commonly accepted measurement base includes: A) net income. B) total assets. C) working capital. D) all of the above.

answer: D Terms: Misstatements and materiality Diff: Moderate Objective: LO 3-6

14) Readers of financial statements often interpret that the number of paragraphs in the independent auditor's report is a "signal" of the entity's financial fairness. Which of the following is not true regarding the number of paragraphs in an independent auditor's report? A) More than three paragraphs indicates either a qualification or report modification. B) An additional paragraph is added before the opinion for a qualified, adverse or disclaimer of opinion. C) An additional paragraph is added after the opinion when there is required information the auditor must report when the opinion is unqualified. D) No explanatory paragraph is required for an unqualified shared report involving other auditors, however, explanatory language is added in the introductory paragraph.

answer: D Terms: Number of paragraphs in independent auditor's report Diff: Challenging Objective: LO 3-4

4) An auditor determines the financial statements include at least a material departure from GAAP. Which type of opinion may be issued? A) Disclaimer Qualified Adverse Yes No No B) Disclaimer Qualified Adverse No Yes No C) Disclaimer Qualified Adverse Yes No Yes D) Disclaimer Qualified Adverse No Yes Yes

answer: D Terms: Opinion , GAAP departure Diff: Moderate Objective: LO 3-5

6) In which situation would the auditor be choosing between "except for" qualified opinion and an adverse opinion? A) The auditor lacks independence. B) A client-imposed scope limitation. C) A circumstance imposed scope limitation. D) Lack of full disclosure within the footnotes.

answer: D Terms: Qualified opinion and adverse opinion Diff: Moderate Objective: LO 3-5

2) An auditor who issues a qualified opinion because sufficient appropriate evidence was not obtained should describe the limitations in an explanatory paragraph. The auditor should also modify the: A) Scope paragraph Opinion paragraph Notes to the financial statements Yes No Yes B) Scope paragraph Opinion paragraph Notes to the financial statements No Yes Yes C) Scope paragraph Opinion paragraph Notes to the financial statements No Yes No D) Scope paragraph Opinion paragraph Notes to the financial statements Yes Yes No

answer: D Terms: Qualified opinion insufficient evidence Diff: Challenging Objective: LO 3-7

3) When an auditor issues a qualified report due to a scope limitation an explanatory paragraph is normally added. Which, if any, of the following paragraphs are also modified? A) Introductory Scope Opinion Yes Yes Yes B) Introductory Scope Opinion Yes Yes No C) Introductory Scope Opinion No Yes No D) Introductory Scope Opinion No Yes Yes

answer: D Terms: Qualified report due to scope restriction; Paragraphs modified Diff: Moderate Objective: LO 3-7

4) The scope paragraph of the standard unqualified audit report states that the audit is designed to: A) discover all errors and/or irregularities. B) discover material errors and/or irregularities. C) conform to generally accepted accounting principles. D) obtain reasonable assurance whether the statements are free of material misstatement.

answer: D Terms: Scope paragraph of standard unqualified audit report states Diff: Easy Objective: LO 3-1

12) Which of the following modifications of the auditor's report does not include an explanatory paragraph? A) A qualified report due to a GAAP departure. B) The report includes an emphasis of a matter. C) There is a very material scope limitation. D) A principle auditor accepts the work of an other auditor.

answer: D Terms: Shared opinions Diff: Moderate Objective: LO 3-4

13) No reference is made in the auditor's report to other auditors who perform a portion of the audit when: I. The other auditor audited an immaterial portion of the audit. II. The other auditor is well known or closely supervised by the principle auditor. III. The principle auditor has thoroughly reviewed the work of the other auditor. A) I and II B) I and III C) II and III D) I, II and III

answer: D Terms: Shared opinions Diff: Moderate Objective: LO 3-4

17) Brown Co.'s financial statements adequately disclose uncertainties that concern future events, the outcome of which are not reasonably estimable. The auditor's report should be a(n): A) unqualified opinion. B) disclaimer. C) qualified opinion. D) adverse opinion.

answer: A Terms: Adequately disclosed uncertainties Diff: Challenging Objective: LO 3-1

3) To emphasize the fact that the auditor is independent, a typical addressee of the audit report could be: A) Company Controller | Shareholders | Board of Directors | No Yes Yes B) Company Controller | Shareholders | Board of Directors | No No Yes C) Company Controller | Shareholders | Board of Directors | Yes Yes No D) Company Controller | Shareholders | Board of Directors | Yes No No

answer: A Terms: Audit report addressee Diff: Easy Objective: LO 3-1

2) Auditing standards require that the audit report must be titled and that the title must: A) include the word "independent." B) indicate if the auditor is a CPA. C) indicate if the auditor is a proprietorship, partnership, or incorporated. D) indicate the type of audit opinion issued.

answer: A Terms: Auditing standards require audit report title Diff: Easy Objective: LO 3-1

19) Indicate which changes would require an explanatory paragraph in the audit report. A) Correction of an error by changing from an accounting principle that is not generally acceptable to one that is generally acceptable | Change from LIFO to FIFO | Yes Yes B) Correction of an error by changing from an accounting principle that is not generally acceptable to one that is generally acceptable | Change from LIFO to FIFO | No No C) Correction of an error by changing from an accounting principle that is not generally acceptable to one that is generally acceptable | Change from LIFO to FIFO | Yes No D) Correction of an error by changing from an accounting principle that is not generally acceptable to one that is generally acceptable | Change from LIFO to FIFO | No Yes

answer: A Terms: Changes that require explanatory paragraph in audit report Diff: Moderate Objective: LO 3-4

21) Indicate which changes would require an explanatory paragraph in the audit report. A) The CPA concludes there is substantial doubt about the entity's ability to continue as a going concern Change from FIFO to LIFO Yes Yes B) The CPA concludes there is substantial doubt about the entity's ability to continue as a going concern Change from FIFO to LIFO No No C) The CPA concludes there is substantial doubt about the entity's ability to continue as a going concern Change from FIFO to LIFO Yes No D) The CPA concludes there is substantial doubt about the entity's ability to continue as a going concern Change from FIFO to LIFO No Yes

answer: A Terms: Changes that would require an explanatory paragraph in audit report Diff: Moderate Objective: LO 3-4

6) A four paragraph auditor opinion is required when: A) Qualified opinion due to departure from GAAP Adverse opinion due to departure from GAAP Yes Yes B) Qualified opinion due to departure from GAAP Adverse opinion due to departure from GAAP No No C) Qualified opinion due to departure from GAAP Adverse opinion due to departure from GAAP Yes No D) Qualified opinion due to departure from GAAP Adverse opinion due to departure from GAAP No Yes

answer: A Terms: Four paragraph auditor opinion Diff: Challenging Objective: LO 3-8

6) Which of the following is least likely to cause uncertainty about the ability of an entity to continue as a going concern? A) A potential lawasuit against the entity for a patent infringement. B) Loss of major customers. C) Significant recurring operating losses. D) Working capital deficiencies.

answer: A Terms: Going concern Diff: Moderate Objective: LO 3-4

1) Examples of unqualified opinions which contain modified wording (without adding an explanatory paragraph) include: A) the use of other auditors. B) material uncertainties. C) substantial doubt about the audited company (or the entity) continuing as a going concern. D) lack of consistent application of GAAP.

answer: A Terms: Modified unqualified opinion Diff: Easy Objective: LO 3-4

2) PCAOB Auditing Standard No. 2 requires the audit of internal control over financial reporting to be integrated with: A) the audit of the financial statements. B) the quarterly review of financial information. C) the review of annual financial statements. D) None of the above.

answer: A Terms: PCAOB Auditing Standard No. 2; Audit of internal control over financial reporting Diff: Moderate Objective: LO 3-3

3) When comparing misstatements with a measurement base, the auditor must consider the pervasiveness of the misstatement. Of the following examples, the most pervasive misstatement is a(n): A) understatement of inventory. B) understatement of retained earnings caused by a miscalculation of dividends payable. C) misclassification of notes payable as a long-term liability when it should be current. D) misclassification of salary expense as a selling expense.

answer: A Terms: Pervasive misstatements Diff: Moderate Objective: LO 3-6

1) When a pervasive scope limitation exists, which paragraphs of the independent auditor's report will differ from the standard unqualified audit report? A) Introductory Scope Opinion Explanatory Yes Yes Yes Yes B) Introductory Scope Opinion Explanatory No Yes Yes Yes C) Introductory Scope Opinion Explanatory No No Yes Yes D) Introductory Scope Opinion Explanatory No No Yes No

answer: A Terms: Pervasive scope limitation Diff: Challenging Objective: LO 3-8

16) The most common case in which conditions beyond the client's and auditor's control cause a scope restriction is an engagement: A) agreed upon after the client's balance sheet date. B) where the client won't allow the auditor to confirm receivables for fear of offending its customers. C) where the auditor doesn't have enough staff to satisfactorily audit all of the client's foreign subsidiaries. D) where the client is going through Chapter 11 bankruptcy.

answer: A Terms: Scope restriction beyond client and auditor control Diff: Challenging Objective: LO 3-5

17) Which of the following is false concerning the principal CPA firm's alternatives when issuing a report when another CPA firm performs part of the audit? A) Issue a joint report signed by both CPA firms. B) Make no reference to the other CPA firm in the audit report, and issue the standard unqualified opinion. C) Make reference to the other auditor in the report by using modified wording (a shared opinion or report). D) A qualified opinion or disclaimer, depending on materiality, is required if the principal auditor is not willing to assume any responsibility for the work of the other auditor.

answer: A Terms: Shared opinions Diff: Challenging Objective: LO 3-4

6) The standard audit report refers to GAAS and GAAP in which paragraphs? A) GAAS | GAAP | Scope only Opinion only B) GAAS | GAAP | Intro only Scope and Opinion C) GAAS | GAAP | Intro and Scope Opinion only D) GAAS | GAAP | Intro only All paragraphs

answer: A Terms: Standard audit report; GAAS and GAAP Diff: Easy Objective: LO 3-1

13) When an adverse opinion is issued, a scope paragraph would be: A) qualified. B) unchanged. C) deleted. D) expanded to identify the additional procedures which the auditor performed.

answer: B Terms: Adverse opinion and scope paragraph Diff: Challenging Objective: LO 3-7

14) In which of the following circumstances would an auditor most likely express an adverse opinion? A) The CEO refuses to let the auditor have access to the board of director meeting minutes. B) The financial statements are not in conformity with the FASB statement on loss contingencies. C) Information comes to the auditor's attention that raises substantial doubt about the ability for the client to continue as a going concern. D) Tests of controls show that the internal control structure is so poor that the auditor has to assess control risk at the maximum.

answer: B Terms: Adverse opinion circumstances Diff: Moderate Objective: LO 3-5

7) When the auditor determines the financial statements are fairly stated and then determines that the auditor lacks independence, the auditor should issue: A) an adverse opinion. B) a disclaimer of opinion. C) either a qualified opinion or an adverse opinion. D) either a qualified opinion or an unqualified opinion with modified wording.

answer: B Terms: Audit report when auditor not independent Diff: Moderate Objective: LO 3-5

11) Subsequent to the close of Spacely Sprockets fiscal year ending October 31, 2012, a major debtor has declared bankruptcy due to a series of events. The receivable is significantly material in relation to the financial statements, and recovery is doubtful. The debtor had confirmed the full amount due to Spacely Sprocket at the balance sheet date. Because the account was confirmed at the balance sheet date, Spacely refuses to disclose any information in relation to this subsequent event. The CPA believes that all other accounts were stated fairly at the balance sheet date. In addition, Spacely changed their method of inventory valuation from FIFO to LIFO. This change was disclosed in Note X to the financial statements. Accordingly, what type of opinion should be expressed? A) Unqualified with an explanatory paragraph. B) Qualified due to a GAAP departure. C) Qualified due to a scope limitation. D) A combination of B and C.

answer: B Terms: Audit report when client has subsequent event and change in inventory valuation Diff: Challenging Objective: LO 3-7

3) Which auditor report would require only one paragraph? A) Disclaimer due to scope restriction Qualified opinion due to scope restriction Yes Yes B) Disclaimer due to scope restriction Qualified opinion due to scope restriction No No C) Disclaimer due to scope restriction Qualified opinion due to scope restriction Yes No D) Disclaimer due to scope restriction Qualified opinion due to scope restriction No Yes

answer: B Terms: Auditor report with one paragraph Diff: Challenging Objective: LO 3-8

20) Indicate which changes would require an explanatory paragraph in the audit report. A) Change in the estimated life of an asset Variation in the format of the financial statements Yes Yes B) Change in the estimated life of an asset Variation in the format of the financial statements No No C) Change in the estimated life of an asset Variation in the format of the financial statements Yes No D) Change in the estimated life of an asset Variation in the format of the financial statements No Yes

answer: B Terms: Changes that require explanatory paragraph in audit report Diff: Moderate Objective: LO 3-4

3) A combined report on financial statements and internal control over financial reporting includes all but which of the following types of paragraphs? A) Inherent limitations paragraph B) Description paragraph C) Opinion paragraph D) Each of the above paragraphs is included.

answer: B Terms: Combined report on financial statements and internal control over financial reporting Diff: Moderate Objective: LO 3-3

3) All of the following are conditions requiring a departure from a standard unqualified audit report except: A) management refused to allow the auditor to confirm significant accounts receivable for which there were no alternative procedures performed. B) management decided not to allow the auditor to confirm significant accounts receivable, but the auditor obtained sufficient appropriate evidence by examining subsequent cash receipts. C) part of the audit was performed by other auditors whose report was furnished to the principle auditor. D) management has determined that fixed assets should be reported in the balance sheet at their replacement values rather than historical costs. The auditors do not concur.

answer: B Terms: Departure from unqualified audit report Diff: Moderate Objective: LO 3-4

1) When the auditor evaluates the effect of a change in accounting principle, the materiality of the change should be evaluated based on: A) the prior years presented. B) the current year. C) guidelines included in GAAS. D) the effect on total assets.

answer: B Terms: Effect of change of accounting principle; Materiality of change Diff: Moderate Objective: LO 3-6

1) The explanatory paragraph for a qualified opinion would: A) easy precede the scope paragraph. B) follow the scope paragraph. C) follow the opinion paragraph. D) either precede or follow the opinion paragraph depending on the materiality.

answer: B Terms: Explanatory paragraph for qualified opinion Diff: Easy Objective: LO 3-7

15) Most auditors believe that financial statements are "presented fairly" when the statements are in accordance with GAAP, and that it is also necessary to: A) determine that they are not in violation of FASB statements. B) examine the substance of transactions and balances for possible misinformation. C) review the statements using the accounting principles promulgated by the SEC. D) assure investors that net income reported this year will be exceeded in the future.

answer: B Terms: Financial statements are presented fairly in accordance with GAAP Diff: Challenging Objective: LO 3-1

7) When there is uncertainty about a company's ability to continue as a going concern, the auditor's concern is the possibility that the client may not be able to continue its operations or meet its obligations for a "reasonable period of time." For this purpose, a reasonable period of time is considered not to exceed: A) six months from the date of the financial statements. B) one year from the date of the financial statements. C) six months from the date of the audit report. D) one year from the date of the audit report.

answer: B Terms: Going concern ; time period Diff: Moderate Objective: LO 3-4

9) The introductory paragraph of the standard audit report states that the financial statements are: A) the responsibility of the auditor. B) the responsibility of management. C) the joint responsibility of management and the auditor. D) none of the above.

answer: B Terms: Introductory paragraph of standard audit report Diff: Moderate Objective: LO 3-1

9) When a company's financial statements contain a departure from GAAP with which the auditor concurs, the departure should be explained in: A) the scope paragraph. B) an explanatory paragraph that appears before the opinion paragraph. C) the opinion paragraph. D) an explanatory paragraph after the opinion paragraph.

answer: B Terms: Justified Departure Diff: Moderate Objective: LO 3-4

4) The dollar amount of some misstatements cannot be accurately measured. For example, if the client were unwilling to disclose an existing lawsuit, the auditor must estimate the likely effect on: A) net income. B) users of the financial statements. C) the auditor's exposure to lawsuits. D) management's future decisions.

answer: B Terms: Misstatements accurately measured Diff: Moderate Objective: LO 3-6

15) Which of the following circumstances would not require more than one report modification in from the standard unqualified independent auditor's report? A) There is a GAAP departure and accounting principles were not consistently applied with that of the preceding year. B) There is a scope limitation and the auditor's are not independent. C) There is a scope limitation and there is substantial doubt about the entity's ability to continue as a going concern. D) There is substantial doubt about the entity's ability to continue as a going concern and the causes of these uncertainties are not adequately disclosed in a footnote.

answer: B Terms: Multiple report modifications from standard unqualified report Diff: Challenging Objective: LO 3-4 AACSB: Analytic skills 16) Which of the following is not an unqualified opinion with modified wording? A) Emphasis of a matter. B) Reports involving other auditors. C) Auditor disagrees with client's departure from GAAP. D) Lack of consistent application of GAAP. --answer: C Terms: Unqualified opinion with modified wording Diff: Challenging Objective: LO 3-4

9) When a pervasive scope limitation exists which paragraphs will be included in the independent auditors report? A) Introductory Scope Opinion Explanatory Yes Yes Yes Yes B) Introductory Scope Opinion Explanatory Yes No Yes Yes C) Introductory Scope Opinion Explanatory Yes No Yes No D) Introductory Scope Opinion Explanatory No No Yes No

answer: B Terms: Pervasive scope limitation Diff: Moderate Objective: LO 3-7

5) A qualified opinion can be issued for which of the following? I. When a limitation on the scope of the audit has occurred. II. When the auditor lacks independence. III. When generally accepted accounting principles have not been used. A) I and II B) I and III C) II and III D) I, II and III

answer: B Terms: Qualified opinion Diff: Moderate Objective: LO 3-5

4) When a qualified or adverse opinion is issued, the qualifying paragraph is inserted: A) between the introductory and scope paragraphs. B) between the scope and opinion paragraphs. C) after the opinion paragraph, as a fourth paragraph. D) immediately after the address, as the first paragraph.

answer: B Terms: Qualified or adverse opinion paragraph placement Diff: Moderate Objective: LO 3-7

6) If the financial statements include an income statement and a balance sheet but exclude the statement of cash flows, the auditors: A) can issue an unqualified report. B) should issue a qualified opinion due to the departure from GAAP. C) should issue a qualified opinion because the missing statement of cash flows constitutes a scope limitation. D) should include the statement of cash flows, modify the report and issue an unqualified opinion.

answer: B Terms: Report when financial statements exclude statement of cash flows Diff: Moderate Objective: LO 3-7

8) When a scope limitation exists in an audit which type of report modification can result? A) Qualified Opinion Paragraph Only Qualified Scope Paragraph Only Disclaimer Opinion No Scope Paragraph Yes No Yes B) Qualified Opinion Paragraph Only Qualified Scope Paragraph Only Disclaimer Opinion No Scope Paragraph No No Yes C) Qualified Opinion Paragraph Only Qualified Scope Paragraph Only Disclaimer Opinion No Scope Paragraph Yes Yes No D) Qualified Opinion Paragraph Only Qualified Scope Paragraph Only Disclaimer Opinion No Scope Paragraph No No No

answer: B Terms: Scope limitation Diff: Moderate Objective: LO 3-7

7) Which of the following is not explicitly stated in the standard unqualified audit report? A) The financial statements are the responsibility of management. B) The audit was conducted in accordance with generally accepted accounting principles. C) The auditors believe that the audit provides a reasonable basis for their opinion. D) An audit includes assessing the accounting estimates used.

answer: B Terms: Standard unqualified audit report Diff: Easy Objective: LO 3-1

8) If an auditor performs an audit of a public company, the scope paragraph should make reference to which standards? A) GAAP. B) GAAS. C) Standards issued by the PCAOB (U.S.). D) International Audit Standards.

answer: C Terms: Audit of public company, scope paragraph Diff: Easy Objective: LO 3-1

1) Whenever an auditor issues an audit report for a public company, the auditor can choose to issue a report in which of the following forms? I. A combined report on financial statements and internal control over financial reporting. II. Separate reports on financial statements and internal control over financial reporting. A) I only B) II only C) Either I or II. D) Neither I nor II.

answer: C Terms: Audit report for public company Diff: Easy Objective: LO 3-3

13) If the balance sheet of a company is dated December 31, 2011, the audit report is dated February 8, 2012, and both are released on February 15, 2012, this indicates that the auditor has searched for subsequent events that occurred up to: A) December 31, 2011. B) January 1, 2012. C) February 8, 2012. D) February 15, 2012.

answer: C Terms: Audit report subsequent event dating Diff: Moderate Objective: LO 3-1

8) When the auditor concludes that there is substantial doubt about the entity's ability to continue as a going concern, the appropriate audit report could be: I. an unqualified opinion with an explanatory paragraph. II. a disclaimer of opinion. A) I only B) II only C) I or II D) Neither I nor II

answer: C Terms: Auditor concludes substantial doubt about entity's ability to continue as going concern Diff: Moderate Objective: LO 3-4