Test #4 Audit (Ch 11, 12, Module A)

"As described in Note 5 to the financial statements, General Express changed its statistical method of computing product warranty expense for the year ended December 31, 2014..." is an illustration of a A. consistency change requiring a qualified opinion. B. scope limitation. C. departure from generally accepted accounting principles. D. report with a consistency modification.

D

11. Which of the following is typically not included in the inquiry letter sent to the client's attorneys? A. A disclaimer regarding the likelihood of settlement of pending litigation B. A listing of pending or threatened litigation, claims, or assessments C. An evaluation of the likelihood of an unfavorable outcome D. An estimate of the range of potential loss

a

11) Shelly's Bank has loaned money to Pete's Auto Supply. The loan is collateralized by inventory. The loan also requires a CPA to observe the count of the inventory and trace sampled items to the vendor invoices in order to determine the value of inventory is not misstated. This service would be: a. an assurance service engagement b. an attestation engagement c. a review engagement d. a compilation engagement

b

12) The reporting standards for an attestation are different from that of an audit because they require: a. the report to include an opinion b. the report to identify the subject matter of the assertion being reported on c. the report requires a statement that the presentation is not in accordance with GAAP d. the report requires a disclosure of the procedures performed during the attestation

b

14) In an agreed-upon procedures engagement, an accountant must: a. follow the attestation standard related to internal control b. follow the attestation standard related to evidential matter c. include negative assurance explicitly in the report d. all of these are true

b

15) A responsible party for information to subject to an attestation engagement would not include: a. the client's controller b. the independent accountant c. the client's vice president of marketing d. a client employee named in a contract or regulation as being responsible for the information

b

13. To whom should written representations be addressed? A. Auditors B. Board of directors C. Client D. Stockholders

a

17) ABC Company prepares financial statements showing the last two years, years X and Y. (Year X is the year prior to year Y.) The auditor performed an audit of year X and a review of year Y. The auditor may: A) report on the year Y review and reissue the year X audit report. B) provide only the report concerning the year Y review. C) reissue the year X audit report with an explanatory paragraph disclosing that only a review was performed on year Y. D) notify the client that prior-year audited financial statements cannot be presented when the current year's statements have not been audited.

a

20) When an accountant is engaged to compile a nonpublic entity's financial statements that omit substantially all disclosures required by GAAP, the accountant should indicate in the compilation report that the financial statements: A) might influence users' conclusions about the business, if the disclosures were included. B) are prepared in conformity with a comprehensive basis of accounting other than GAAP. C) are not compiled in accordance with Statements on Standards for Accounting and Review Services. D) are special-purpose financial statements that are not comparable to those of prior periods.

a

20. Before the impact of adjusting entries proposed by auditors are included in the client's financial statements, the adjustments must be approved by the A. client's management. B. audit manager. C. engagement partner. D. engagement quality review partner.

a

21. Subsequent events occur between the ____ and the ____. A. date of the financial statements; date of the auditors' report B. date of the auditors' report; audit report release date C. date of the financial statements; audit report release date D. audit report release date; beginning of subsequent year's audit

a

23) Which of the following best describes an engagement to report on an entity's internal control over financial reporting for a nonpublic company? A) An attestation engagement to examine and report on management's written assertions about the effectiveness of its internal control structure. B) An audit engagement to render an opinion on the entity's internal control structure. C) A prospective engagement to project, for a period of time not to exceed one year, and report on the expected benefits of the entity's internal control structure. D) A consulting engagement to provide constructive advice to the entity on its internal control structure.

a

24) Delta Life Insurance Co. prepares its financial statements on an accounting basis insurance companies use pursuant to the rules of a state insurance commission. Wall, CPA, is Delta's auditor. If Wall discovers that the statements are not suitably titled, Wall should: A) disclose any reservations in an explanatory paragraph and qualify the opinion. B) apply to the state insurance commission for an advisory opinion. C) issue a special statutory basis report that clearly disclaims any opinion. D) explain in the notes to the financial statements the terminology used.

a

37) In order to perform a review of interim financial information, the auditor must: A) have audited or be in the process of auditing the entity's latest financial statements. B) tested the entity's internal controls to determine that financial information is reliable. C) sent confirmation to third-parties concerning significant related-party transactions. D) established sufficient criteria to form an opinion on the fair presentation of the financial information.

a

37. A partner of the accounting firm who has not been involved in the audit performs an engagement quality review of documentation. This review usually focuses on A. the fair presentation of the financial statements in conformity with GAAP. B. irregularities involving the client's management and its employees. C. the materiality of the adjusting entries proposed by the audit staff. D. the communication of internal control deficiencies to the client's audit committee (or those charged with governance).

a

4) The phrase "Trust services" refers to: a. WebTrust and SysTrust Services b. XBRL and SysTrust Services c. WebTrust and XBRL Services d. all AICPA designated assurance services

a

4. For which of the following objectives would auditors be least likely to use analytical procedures near the end of the audit? A. Obtaining evidence about assertions related to account balances or classes of transactions B. Evaluating the adequacy of evidence gathered in response to unexpected account balances C. Identifying unusual or unexpected account balances or relationships among account balances that were not previously identified during the audit D. Evaluating the adequacy of evidence gathered in response to unexpected relationships among account balances

a

2) Assurance services are defined as independent professional services that: a. establish criteria for effective measurement of business activity. b. improve the quality of information, or its context, for decision makers. c. attest to the adequacy of controls over business operations. d. develop efficient and effective accounting systems to ensure compliance with accounting standards and policy.

b

21) Which of the following procedures ordinarily should be applied when an independent accountant conducts a review of interim financial information of a publicly held entity? A) Verify changes in key account balances. B) Read the minutes of the board of directors' meetings. C) Inspect the open purchase order file. D) Perform cut-off tests for cash receipts and disbursements.

b

22. Which of the following substantive procedures would not ordinarily be used by auditors in evaluating the potential existence of subsequent events? A. Reviewing the latest interim financial statements B. Performing cut-off testing near year end C. Inquiring of officers and other client executives D. Obtaining written representations

b

23. Which of the following conditions or set of circumstances would not ordinarily raise questions about the entity's ability to continue as a going concern? A. Violation of debt covenants B. Failure to meet forecasted earnings per share C. Legal proceedings that may have a significant negative impact on the entity D. Negative cash flow from operations for each of the last three years

b

25. The Orange Corporation was audited for the year ended December 31. The audit was completed on January 25; prior to the release of the report, auditors learned of a two-for-one stock split on February 1. If dual dating is used, what are the proper dates for the auditors' reports? A. December 31 and January 25 B. January 25 and February 1 C. January 25 and February 15 D. February I and February 15

b

31) Which of the following is not a condition that must be met before an accountant can conduct an engagement concerning a nonpublic entity's internal control over financial reporting? A) Management accepts responsibility for the effectiveness of its internal control. B) Management has appropriately documented the internal controls. C) Management's evaluation of control can be supported by sufficient evidence. D) Management presents a written assertion about the effectiveness of its internal control.

b

41. Auditors try to identify predictable relationships when using analytical procedures. Relationships involving transactions from which of the following accounts most likely would yield the highest level of evidence? A. Accounts receivable B. Interest expense C. Accounts payable D. Travel and entertainment expense

b

42. On March 15, 2015, Kent, CPA, issued an unqualified opinion on a client's audited financial statements for the year ended December 31, 2014. On May 4, 2015, Kent's internal inspection program disclosed that engagement personnel failed to observe the client's physical inventory. Omission of this procedure impairs Kent's present ability to support the unqualified opinion. If the stockholders are currently relying on the opinion, Kent should first A. advise management to disclose to the stockholders that Kent's unqualified opinion should not be relied on. B. undertake to apply alternative procedures that would provide a satisfactory basis for the opinion. C. reissue the auditors' reports and add an explanatory paragraph describing the departure from generally accepted auditing standards. D. compensate for the omitted procedure by performing tests of controls to reduce audit risk to a sufficiently low level.

b

10) The accountant's standard report for a compilation service would not include a statement that: a. a compilation service has been performed in accordance with standards established by the AICPA b. financial statement information is the representation of the owners of the business c. compilation service consists primarily of inquiries of company personnel and analytical procedures applied to financial data. d. financial statements have not been audited or reviewed and the accountant does not express an opinion or any other form of assurance

c

12. Which party should request a letter regarding litigation, claims, and assessments from the client's attorney? A. Attorney B. Auditors C. Client D. Securities and Exchange Commission or other regulatory body

c

22) An auditor's special report on financial statements prepared in conformity with the cash basis of accounting should include a separate explanatory paragraph before the opinion paragraph that: A) justifies the reasons for departing from generally accepted principles. B) states whether the financial statements are fairly presented in conformity with a special purpose framework. C) refers to the note to the financial statements that describes the special purpose framework. D) explains how the results of operations differ from financial statements prepared in conformity with generally accepted accounting principles.

c

24. Which of the following subsequent events would represent an event that provides information about conditions that arose following the date of the financial statements? A. Settlement of long outstanding litigation B. Collection of a past due accounts receivable C. Loss of inventory as a result of a flood D. An additional tax assessment on prior income

c

25) When providing limited assurance that the reviewed financial statements of a nonpublic entity require no material modifications to be in accordance with generally accepted accounting principles, the accountant should: A) assess the risk that a material misstatement could occur in a financial statement assertion. B) confirm with the entity's lawyer that material loss contingencies are disclosed. C) understand the accounting principles of the industry in which the entity operates. D) develop audit plans to determine whether the entity's financial statements are fairly presented.

c

26. Auditors have a responsibility to evaluate whether financial statements properly reflect all known events through the A. date of the financial statements. B. date of the auditors' report. C. audit report release date. D. subsequent year's date of the financial statements.

c

27. Management letters are not a means of A. reporting recommendations to the client. B. assisting the client in improving its operations. C. satisfying professional requirements to communicate matters related to the client's internal control. D. developing rapport with the client.

c

28) Compiled financial statements of a nonpublic entity should be accompanied by a report stating that: A) the scope of the accountant's procedures has not been restricted in testing the financial information that is the representation of management. B) the accountant assessed the accounting principles used and significant estimates made by management. C) the accountant does not express an opinion or any other form of assurance on the financial statements. D) a compilation consists primarily of inquiries of entity personnel and analytical procedures applied to financial data.

c

30) Hamell Corporation is making a presentation to a perspective investor. The presentation includes a projection showing that the company's sales will be between $25,000,000 and $27,000,000 within the next three years. Hamell believes the information will be better received if its CPA provides an attestation report on the projection. The CPA should insure that proper disclosure is made to indicate that: A) the $27,000,000 estimate is a best case scenario. B) the range of the projection is appropriate given the circumstances. C) the range does not indicate a "best" and "worst" case scenario. D) projections are limited in their information content due to uncontrollable changes in the business environment.

c

31. The primary objective of analytical procedures used near the end of an audit is to A. obtain evidence from details tested to corroborate management assertions. B. obtain evidence on the validity of the assessment of control risk. C. assist auditors in evaluating the overall financial statement presentation. D. identify areas that represent specific risks relevant to the audit.

c

32) Which of the following steps is not required in performing a compliance attestation engagement? A) Assess planning materiality. B) Assess inherent risk. C) Confirm restrictions with applicable third-parties. D) Consider subsequent events.

c

33) An accountant's report includes the phrase "We are not aware". This phrase indicates: A) an attestation was not performed. B) management had not established sufficient criteria for an opinion to be issued. C) the auditor is providing negative assurance. D) a disclaimer of opinion is presented.

c

34) The procedures used in a review engagement are: A) physical examination, reperformance, and obtaining a management representation letter. B) analytical procedures, reperformance, and obtaining a management representation letter. C) analytical procedures, inquiry, and obtaining a management representation letter. D) physical examination, inquiry, and obtaining a management representation letter.

c

34. The primary source of information auditors use to obtain information about litigation, claims, and assessments is the A. client's attorney. B. court records. C. client's management. D. independent auditors.

c

39) Other Comprehensive Basis of Accounting (OCBOA) includes all of the following except: A) statements that conform to a regulatory agency. B) statements prepared on a tax basis. C) statements that conform to accounting principles that are generally accepted. D) statements prepared on a cash basis.

c

45. Which of the following is an audit procedure that auditors most likely would perform concerning litigation, claims, and assessments? A. Request the client's attorney to evaluate whether the client's pending litigation claims, and assessments indicate a going concern problem. B. Examine the legal documents in the client's attorney's possession concerning litigation, claims, and assessments to which the attorney has devoted substantive attention. C. Discuss with management its policies and procedures adopted for evaluating and accounting for litigation, claims, and assessments. D. Confirm directly with the client's attorney that all litigation, claims, and assessments have been recorded or disclosed in the financial statements.

c

46) AR 90 requires adequate documentation for a review engagement. Which items are required to be documented? A) Analytical procedures: Yes; Management representations: No; Understanding of internal controls: No B) Analytical procedures: No; Management representations: Yes; Understanding of internal controls: No C) Analytical procedures: Yes; Management representations: Yes; Understanding of internal controls: No D) Analytical procedures: Yes; Management representations: Yes; Understanding of internal controls: Yes

c

46. Which of the following procedures would auditors most likely perform to obtain evidence about the occurrence of subsequent events? A. Confirming a sample of material accounts receivable established after year-end B. Comparing the financial statements being reported on with those of the prior period C. Reading minutes of meetings of owners, management, or those charged with governance held after the date of the financial statements D. Inquiring as to whether any unusual adjustments were made just before year-end

c

47. Which of the following events occurring after the audit report release date most likely would cause auditors to make further inquiries about the previously-issued financial statements? A. An uninsured natural disaster occurs that may affect the entity's ability to continue as a going concern. B. A contingency is resolved that had been disclosed in the audited financial statements. C. New information is discovered concerning undisclosed lease transactions during the period under audit. D. A subsidiary is sold that accounts for 25% of the entity's consolidated net income.

c

5) Which of the following is not a principle of Trust Service engagements? a. security from unauthorized use b. availability of the system, products, or services c. proficiency in preparing transactions d. confidentiality of information

c

7. Why should auditors be particularly concerned with "miscellaneous", "other", and "clearing" accounts classified as revenues or expenses? A. These accounts are likely to relate to going-concern matters. B. These accounts are often more difficult to audit using normal substantive procedures. C. These accounts may represent attempts of earnings management. D. These accounts are likely to require the assistance of a specialist.

c

9) Attestation engagements include: a. only examination b. examinations and assurance services c. examinations, reviews, and agreed-upon procedures d. examinations, reviews, compilations, agreed-upon procedures, and assurance services

c

9. An important method used by auditors to learn of material contingencies is A. examining documents in the client's possession concerning contingencies. B. inquiring and discussing them with management. C. obtaining responses to an attorney letter. D. confirming accounts receivable with the client's customers.

c

28. An engagement quality review by a second partner of the audit documentation and financial statements is performed to ensure that the: A. "to-do lists" are reviewed and cleared. B. audit plan procedures are "signed off." C. tick-mark notations are cleared. D. audit work meets the quality standards of the firm.

d

3. Roll-forward work normally occurs between the ____ and the ____. A. beginning of the year under audit; audit report release date B. date of the financial statements; audit report release date C. beginning of the year under audit; date of the financial statements D. date of interim work; date of the auditors' report

d

49. If an entity had litigation pending at the date of the financial statements and auditors learn of the outcome of this litigation following the date of their report (but prior to the audit report release date), this is known as a(n) A. omitted procedure. B. prior period adjustment. C. subsequent event. D. subsequently discovered fact.

d

8. Which of the following is the most effective method of identifying potential earnings management attempts? A. Analytical procedures B. Detailed substantive procedures C. Inquiry of client management and key financial personnel D. Scanning accounts for unusual items

d

10. The auditors' report on the entity's financial statements included an additional paragraph disclosing a difference of opinion between the auditors and the entity for which the auditors believed an adjustment to the financial statements should be made. The opinion paragraph of the auditors' report should express a(n) A. unmodified opinion. B. qualified opinion citing a departure from generally accepted accounting principles. C. qualified opinion citing a scope limitation and lack of specific evidence. D. disclaimer of opinion.

B

12. The issuance of a disclaimer of opinion generally indicates A. the auditors cannot form an opinion on the fairness of presentation of the financial statements as a whole. B. the auditors have some uncertainties, but these uncertainties are not so material that they cannot form an opinion on the fairness of presentation of the financial statements as a whole. C. the auditors have observed a departure from generally accepted accounting principles but the departure is not of sufficient materiality to justify a qualified opinion. D. the auditors have observed a departure from generally accepted accounting principles that is so material and pervasive that a qualified opinion is not justified.

A

13. When an entity will not permit inquiry of outside legal counsel, the auditors' report on the entity's financial statements will ordinarily contain a(n) A. disclaimer of opinion. B. qualified opinion referencing a departure from generally accepted accounting principles. C. unmodified opinion with an additional paragraph. D. adverse opinion.

A

14. In which of the following circumstances may auditors issue the standard (unmodified) report on the entity's financial statements? A. The entity changed accounting principles having an immaterial effect on the entity's financial position, results of operations, and cash flows. B. The auditors wish to emphasize a matter regarding the financial statements. C. The auditors reference component auditors who examined a subsidiary of group financial statements. D. The auditors have not been able to audit a substantial portion of the balance sheet because of a circumstance-imposed scope limitation.

A

16. When auditors lack independence, which of the following is true about the report on the entity's financial statements that should be issued? A. The auditors should disclaim an opinion and should state specifically that they are not independent. B. The auditors should disclaim an opinion but not mention that they are not independent. C. The auditors should issue an unmodified opinion with an other-matter paragraph stating that they are not independent. D. The auditors should issue a qualified opinion with an other-matter paragraph stating that they are not independent.

A

21. If management fails to provide adequate justification for a change from one generally accepted accounting principle to another, the auditors should A. add an additional paragraph and express a qualified or an adverse opinion on the entity's financial statements for lack of conformity with generally accepted accounting principles. B. disclaim an opinion on the entity's financial statements because of uncertainty. C. disclose the matter in an additional paragraph but not modify the opinion paragraph on the entity's financial statements. D. neither modify the opinion on the entity's financial statements nor disclose the matter because both principles are generally accepted accounting principles.

A

62. How do auditors make the following representations when issuing the standard (unmodified) auditors' report? Consistent Application of Accounting Principles Use of Judgment in Selecting Audit Procedures A. Implicitly, Explicitly B. Explicitly, Implicitly C. Implicitly, Explicitly D. Explicitly, Explicitly

A

1. Which of the following events or activities may occur following the audit report release date? A. Interim testing B. Roll-forward work C. Subsequent events D. Subsequently discovered facts

d

49) A report on sustainability, as defined by the AICPA, might include all of the following except A) economic viability. B) social responsibility. C) environmental responsibility. D) internal control over financial reporting.

d

22. Charlie Company's comparative financial statements include the financial statements of the prior year that were audited by predecessor auditors whose report on those financial statements is not presented. If the predecessor's report was qualified, the successor auditors should A. indicate in their report the substantive reasons for the qualification issued by the predecessor auditors. B. request the entity to reissue the predecessor's report on the prior-years' statements. C. issue an updated comparative report on the entity's financial statements, indicating the involvement of component auditors. D. express an opinion only on the current-year's financial statements and make no reference to the prior-years' financial statements or opinion.

A

23. Auditors who are reporting on financial statements that contain a material departure from generally accepted accounting principles should include an additional paragraph and A. express a qualified or adverse opinion. B. not modify the opinion paragraph as long as the departure is adequately disclosed in a footnote. C. disclaim an opinion on the financial statements. D. express a qualified opinion or disclaimer of opinion.

A

28. Under which of the following circumstances would a disclaimer of opinion on the entity's financial statements not be appropriate? A. The financial statements fail to contain adequate disclosure of related-party transactions. B. The entity refuses to permit its attorney to furnish information requested in an attorney letter. C. The auditors are engaged after the date of the financial statements and are unable to observe physical inventories or apply alternative procedures to verify their balances. D. The auditors are unable to determine the amounts associated with illegal acts committed by the entity's management.

A

3. Which of the following statements is not included in the Auditor's responsibility section of the standard (unmodified) report on the entity's financial statements? A. "We have audited the accompanying financial statements..." B. "Those standards require that we plan and perform the audit..." C. "The procedures selected depend upon the auditor's judgment..." D. "An audit involves performing procedures to obtain audit evidence about the amounts and disclosures..."

A

30. Reference in a group auditors' report to the fact that part of the audit of group financial statements was performed by component auditors most likely would be an indication of A. involvement of component auditors in the audit of the group financial statements. B. the portion of the group statements audited by the component auditors not being considered material. C. group auditors' recognition of the component auditors' competence, reputation, and professional certification. D. different opinions the auditors are expressing on the components of the financial statements that each audited.

A

36. Green, CPA, was engaged to audit the financial statements of Essex Co. after its fiscal year had ended. The timing of Green's appointment and the start of field work made confirmation of accounts receivable by direct communication with the customers not feasible. However, Green applied other procedures and was satisfied as to the reasonableness of the account balances. Green's auditors' report most likely contained a(n) A. unmodified opinion. B. unmodified opinion with an emphasis-of-matter paragraph. C. qualified opinion due to a scope limitation. D. qualified opinion due to a departure from generally accepted auditing standards.

A

42. When reporting on comparative financial statements, auditors ordinarily should modify their previously expressed opinion on the prior-years' financial statements if the A. prior-years' financial statements are restated to conform with generally accepted accounting principles. B. auditors were predecessor auditors who have been requested by a former client to reissue the previous report. C. prior-years' opinions were unmodified and the opinion on the current-year's financial statements is modified due to a lack of consistency. D. prior-years' financial statements are restated following an acquisition in the current year.

A

44. When component auditors are involved in the audit of group financial statements, the group auditors are required to A. consider the independence and professional reputation of the component auditors in deciding how to utilize their work. B. identify the extent of component auditors' involvement if they choose not to rely on the component auditors' work. C. identify the component auditors by name in their report to appropriate limit their liability for the component auditors' work. D. disclaim an opinion on the portion of the financial statements examined by the component auditors.

A

5. If financial statements contain a material but non-pervasive departure from generally accepted accounting principles, the auditors should render a(n) A. qualified opinion with reference to departure. B. adverse opinion with scope limitation reference. C. adverse opinion with reference to departure. D. disclaimer of opinion.

A

50. What is the major difference between a reissued report and an updated report? A. An updated report considers information that has come to their attention since the date of the original report, while a reissued report does not consider this information. B. An updated report can be presented along with the entity's financial statements, but a reissued report cannot be presented along with the entity's financial statements. C. An updated report will express a different opinion on the prior-years' financial statements that that originally expressed by the auditors, while a reissued report will express the same opinion. D. An updated report will not express an opinion other than an unmodified opinion, while a reissued report can express an unmodified opinion, qualified opinion, adverse opinion, or disclaimer of opinion.

A

53. Which of the following best reflects the auditors' reporting responsibility under generally accepted auditing standards? Other Information Accompanying the Financial Statements Required Supplementary Information A. Exception, Required B. Exception, Exception C. Required, Required D. Required, Exception

A

58. Hart, CPA is auditing the year 2 financial statements of Kell Co. Previously, Hart audited Kell's year 1 financial statements and expressed a qualified opinion due to a scope limitation. Hart decides to include an other-matter paragraph in the year 2 report because comparative financial statements are being presented for year 2 and year 1. This paragraph should indicate the A. substantive reasons for the prior-year's qualification. B. reason that Hart continued to provide audit services, despite the previous scope limitation. C. consistency of application of accounting principles between year 2 and year 1. D. restriction on the distribution of the report.

A

68. When auditors conclude that a material and pervasive departure from GAAP exists in an entity's financial statements, which of the following phrases would most likely be included in their report? A. "Do not present fairly in all material respects." B. "Except for the effects of the departure from generally accepted accounting principles, as discussed in the preceding paragraph." C. "We were engaged to audit the accompanying financial statements." D. "As a result of the departures discussed in the following paragraph."

A

71. The auditors have determined that there is substantial doubt about an entity's ability to continue as a going concern. When considering the appropriateness of management's disclosures and severity of the uncertainty, all of the following reports could be issued, except A. qualified opinion based on a material and pervasive uncertainty. B. unmodified opinion with an emphasis-of-matter paragraph describing the uncertainty. C. adverse opinion based on inadequate disclosure of the uncertainty. D. disclaimer of opinion based on a material and pervasive uncertainty.

A

73. When a circumstance-imposed scope limitation has a material but not pervasive effect on the sufficiency of the auditors' evidence, the auditors' report will A. modify the opinion paragraph. B. modify the Auditor's Responsibility section and opinion paragraph. C. modify the introductory paragraph, Auditor's Responsibility section, and opinion paragraphs. D. modify the introductory and opinion paragraphs and omit the Auditor's Responsibility section.

A

74. Which of the following guidelines should be followed when a disclaimer of opinion is issued? A. The report should identify the financial statements accompanying the disclaimer of opinion. B. The report should be addressed to the client and specific users who originally retained the auditors. C. If the disclaimer is due to a lack of independence, the report should indicate the specific reasons for the auditors not being independent. D. The report should include a reference to any auditing procedures performed prior to issuing the disclaimer.

A

83. Harris is auditing the financial statements of Cole Corp., an energy company. The FASB requires that these financial statements must be accompanied by supplementary mineral reserve information. If this required information is materially misstated, what type of report should Harris issue? A. Unmodified opinion with an other-matter paragraph disclaiming an opinion on the mineral reserve information B. Adverse opinion on the financial statements and mineral reserve information due to the misstatement C. Unmodified opinion on the financial statements with an other-matter paragraph expressing an adverse opinion on the mineral reserve information D. Qualified opinion on the financial statements and mineral reserve information due to the misstatement

A

Which of the following statements is not included in the Auditor's Responsibility section of the standard (unmodified) report? A. "In accordance with accounting principles generally accepted in the United States of America." B. "We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion." C. "An audit also includes evaluating the appropriateness of accounting policies used..." D. "Those standards require that we plan and perform the audit to obtain reasonable assurance..."

A

11. Auditors will issue an adverse opinion when A. a severe scope limitation has been imposed by the entity. B. a violation of generally accepted accounting principles is sufficiently material and pervasive that a qualified opinion is not justified. C. a qualified opinion cannot be rendered because the auditors lack independence. D. the entity's ability to continue as a going concern is subject to substantial doubt.

B

18. Auditors should disclose the substantive reasons for expressing an adverse opinion on the entity's financial statements in an additional paragraph A. preceding the Auditor's Responsibility section. B. preceding the opinion paragraph. C. following the opinion paragraph. D. within the footnotes to the financial statements.

B

20. Restrictions imposed by an entity prohibited the observation of physical inventories, which accounted for 35% of total assets. Alternative auditing procedures were not feasible, although the auditors were able to examine satisfactory evidence for all other items in the financial statements. The auditors would most likely express A. a qualified opinion on the entity's financial statements, referring to a departure from generally accepted accounting principles. B. a disclaimer of opinion on the entity's financial statements. C. an unmodified opinion on the entity's financial statements with an additional paragraph. D. an unmodified opinion on the entity's financial statements with a modification of the Auditor's Responsibility section.

B

24. Which of the following is an example of a material accounting change that requires recognition in an unmodified opinion on the entity's financial statements? A. A change in the estimate of useful lives used to depreciate property, plant and equipment B. A change in the entity's form of reporting entity C. Management has changed from one generally accepted accounting principle to another but has not provided reasonable justification D. A change from an accounting principle that conforms with GAAP to one that does not

B

35. In which of the following circumstances would auditors most likely add an emphasis-of-matter paragraph to the standard (unmodified) report without modifying the opinion on the entity's financial statements? A. The auditors are asked to report on the balance sheet, but not on the other basic financial statements. B. There is substantial doubt about the entity's ability to continue as a going concern. C. Management's estimates of the effects of future events on the entity's financial condition, results of operations, and cash flows are unreasonable. D. Certain transactions cannot be tested because of management's records retention policy.

B

37. In which of the following situations would auditors ordinarily choose between expressing a qualified opinion or an adverse opinion on the entity's financial statements? A. The auditors did not observe the entity's physical inventory and are unable to become satisfied as to its balance by other auditing procedures. B. The financial statements fail to disclose information that is required by generally accepted accounting principles. C. The auditors are asked to report only on the entity's balance sheet and not on the other basic financial statements. D. Events disclosed in the financial statements cause the auditors to have substantial doubt about the entity's ability to continue as a going concern.

B

38. The auditors conclude that an entity's illegal act, which has a material effect on the financial statements, has not been properly accounted for or disclosed. Depending on the overall materiality and pervasiveness of the effect of this illegal act on the financial statements, the auditors should express either a(n) A. adverse opinion or a disclaimer of opinion. B. qualified opinion or an adverse opinion. C. disclaimer of opinion or an unmodified opinion with a separate emphasis-of-matter paragraph. D. unmodified opinion with a separate emphasis-of-matter paragraph or a qualified opinion.

B

39. Auditors would not normally issue a qualified opinion on the entity's financial statements when A. an accounting principle at variance with generally accepted accounting principles is used. B. the auditors lack independence with respect to the audited entity. C. a scope limitation prevents the auditors from completing an important auditing procedure. D. the entity has undertaken a change in accounting principle with which the auditor does not agree.

B

48. Situations in which auditors provide additional copies of a previous issued report or grant entities permission to use a previously issued report in a document containing financial statements after its original date are known as A. additional use reports. B. reissued reports. C. subsequent use reports. D. updated reports.

B

52. What is the auditors' responsibility for reporting on other information accompanying financial statements? A. Because this information is not a fundamental part of the financial statements, the auditors have no reporting responsibility with respect to this information. B. Auditors are required to report on other information only if it is misstated or inconsistent with the financial statements. C. Auditors are required to provide reasonable assurance with respect to whether the other information is presented in accordance with generally accepted accounting principles. D. Auditors are required to express an opinion on whether the other information is presented in accordance with generally accepted accounting principles.

B

54. Which of the following is true with respect to the auditors' report on summary financial statements? A. Auditors can only issue a report on summary financial statements if they have expressed an unmodified opinion on the full financial statements. B. The report will indicate whether the summary financial statements are fairly stated in relation to the full financial statements. C. The report will express negative assurance on whether the summary financial statements are prepared in accordance with AICPA presentation guidelines. D. The report will express an opinion on whether the summary financial statements present the financial condition, results of operations, and cash flows in accordance with generally accepted accounting principles.

B

6. Which of the following scope limitations would ordinarily be of most concern to the auditors? A. The inability to observe inventories because auditors were appointed following the date of the financial statements B. Management's refusal to provide auditors with written representations C. The inability to obtain confirmation of year-end balances from customers because of different billing dates D. The use of the work of component auditors in the audit of group financial statements

B

66. An auditor may report on summary financial statements that are derived from a complete set of audited financial statements only if the auditor A. expresses an unmodified opinion on the audited financial statements from which the summary financial statements are derived. B. indicates whether the information is fairly stated in all material respects in relation to the complete financial statements. C. determines that the summary financial statements include all the disclosures necessary for the complete set of financial statements. D. presents the summary financial statements in comparative form with the prior-year summary financial statements.

B

75. Holmes & Smith LLP were engaged to audit the financial statements of Sodolak Reality for the year ended December 31. During the engagement, Sodolak filed a lawsuit against Holmes & Smith LLP. What effect, if any, will this lawsuit have on the auditors' report? A. The report should be modified to include an emphasis-of-matter paragraph describing the pending litigation. B. A disclaimer of opinion should be issued because the auditors' independence is impaired. C. The litigation will not have any impact on the report or auditors' independence unless Holmes & Smith are found guilty. D. A qualified or adverse opinion should be issued depending on the severity of the lawsuit.

B

77. Carson, LLP audited Best Corporation's financial statements for the year ended December 31, Year 1. On February 15, Year 3, Carson gave Best permission to reissue the report previously issued on and dated March 1, Year 2. When is the cutoff date for Carson's responsibility on the reissued report? A. December 31, Year 1 B. March 1, Year 2 C. December 31, Year 2 D. February 15, Year 3

B

79. When updating the report on prior-years' financial statements presented in comparative form, the auditors' responsibility for the prior-years' financial statements is A. limited to the previously issued report date. B. extended to the date of the updated audit report. C. limited to 30 days after the date of the prior years' financial statements. D. extended to the updated report date only if information comes to the auditors' attention requiring modification of the previously expressed opinion.

B

8. A report that acknowledges reliance on the reports of component auditors is a type of report modification known as a(n) A. qualification. B. division of responsibility. C. expansion of scope. D. scope limitation.

B

27. When disclaiming an opinion due to a client-imposed scope limitation, auditors should describe the nature of the scope limitation in an additional paragraph and modify the A. introductory paragraph. B. introductory paragraph and Auditor's Responsibility section. C. introductory paragraph, Auditor's Responsibility section, and opinion paragraph. D. Auditor's Responsibility section and opinion paragraph.

C

32. When there has been a change in accounting principles, but the effect of the change on the comparability of the financial statements is not material, the auditors should A. refer to the change in an emphasis-of-matter paragraph. B. explicitly concur that the change is preferred. C. not refer to consistency in the report. D. refer to the change in the opinion paragraph.

C

34. In which of the following circumstances would auditors be most likely to express an adverse opinion? A. The chief executive officer refuses to provide the auditors access to minutes of board of directors' meetings. B. Tests of controls show that the entity's internal control is so ineffective that it cannot be relied upon. C. The financial statements are not in accordance with generally accepted accounting principles regarding the capitalization of leases. D. Information comes to the auditors' attention that raises substantial doubt about the entity's ability to continue as a going concern.

C

40. Which of the following phrases would auditors most likely include in their report when expressing a qualified opinion on the entity's financial statements because of inadequate disclosure? A. "Subject to the departure from generally accepted accounting principles, as described above." B. "With the foregoing explanation of these omitted disclosures." C. "Except for the omission of the information discussed in the preceding paragraph." D. "Does not present fairly in all material respects."

C

41. If the auditors obtains sufficient appropriate evidence on the entity's accounts receivable balance by alternative procedures because it is impracticable to confirm accounts receivable, the opinion on the entity's financial statements should be unmodified and would A. disclose the fact that alternative procedures were used due to client-imposed scope limitation. B. disclose in the opinion paragraph that confirmation of accounts receivable was impracticable. C. not mention the alternative procedures. D. include an other-matter paragraph that discloses the performance of alternative procedures.

C

43. Which of the following paragraphs or sections of the group auditors' report is modified to identify the extent of component auditor involvement in the audit of group financial statements? A. The introductory paragraph B. The Management's Responsibility section C. The Auditor's Responsibility section D. The opinion paragraph

C

47. Which of the following situations would require auditors to add an other-matter paragraph to their report on comparative financial statements? A. An unmodified opinion is issued in the current year while a qualified opinion was issued in prior years. B. A qualified opinion is issued in the current year because of a scope limitation; because this limitation was not encountered in prior years, the opinion issued in those years was unmodified. C. The updated opinion issued on prior-years' financial statements differs from the opinion originally issued on those financial statements. D. The auditors' unmodified opinion issued on prior-years' financial statements is still considered to be appropriate.

C

49. When a predecessor auditor has examined the prior-years' financial statements presented in comparative format, the current auditors' report should A. make no reference to the predecessor auditors' report. B. reference the predecessor auditors' report in the introductory paragraph, Auditor's Responsibility section, and opinion paragraph. C. reference the predecessor auditors' report in an other-matter paragraph. D. disclaim an opinion on the prior-years' financial statements.

C

51. On which of the following matters would it not be appropriate for the auditors to report using an other-matter paragraph? A. A material inconsistency between other information and the financial statements B. Procedures performed related to supplementary mineral reserve information required by the Financial Accounting Standards Board C. The consistency of summary financial statements with the audited financial statements from which they were derived D. An updated opinion on comparative financial statements that differs from the opinion originally issued by the auditors

C

55. An auditor who is unable to form an opinion on a new client's opening inventory balances may issue an unmodified opinion on the current year's A. income statement only. B. statement of cash flows only. C. balance sheet only. D. statement of changes in shareholders' equity only.

C

56. Zag Co. issues financial statements that present financial position and results of operations, but Zag omits the related statement of cash flows. Zag would like to engage Brown, CPA, to audits its financial statements without the statement of cash flows although Brown's access to all of the information underlying the basic financial statements would not be limited. Under the circumstances, Brown most likely would A. add an other-matter paragraph to the standard (unmodified) report that justifies the omission. B. refuse to accept the engagement as proposed because of the client-imposed scope limitation. C. explain to Zag that the omission requires a qualification of the auditors' opinion. D. prepare the statement of cash flows as an accommodation to Zag and express an unmodified opinion.

C

59. The group auditors decide not to refer to the audit of component auditors who audited a subsidiary of the group financial statements. After making inquiries about the component auditors' professional reputation and independence, the group auditor most likely would A. document in the engagement letter that the group auditors assume no responsibility for the component auditors' work. B. obtain written permission from the component auditors to omit the reference in the group auditors' report. C. contact the component auditors' and review the audit programs and working papers pertaining to the subsidiary. D. add an additional paragraph to the group auditors' report indicating that the subsidiary's financial statements are not material to the consolidated financial statements.

C

60. In which of the following should an auditors' report refer to the lack of consistency when there is a change in accounting principle that is significant? A. The Auditor's Responsibility section B. The opinion paragraph C. An emphasis-of-matter paragraph following the opinion paragraph D. An emphasis-of-matter paragraph before the opinion paragraph

C

64. After considering management's plans, an auditor concludes that there is substantial doubt about a client's ability to continue as a going concern for a reasonable period of time. The auditor's responsibility includes A. disclaiming an opinion on the financial statements due to the indications of possible financial difficulties. B. indicating to the client's audit committee whether management's plans for dealing with the adverse effects of the financial difficulties can be effectively implemented. C. considering the adequacy of disclosure about the client's possible inability to continue as a going concern. D. issuing a qualified or adverse opinion, depending upon materiality, due to the possible effects on the financial statements.

C

69. Which of the following would not be communicated to users in the auditors' report on an entity's financial statements and related disclosures? A. Whether the financial statements are presented in accordance with GAAP, or another applicable financial reporting framework B. Unusual aspects of the audit examination, such as the involvement of component auditors in the audit of group financial statements C. Specific details regarding the audit examination, such as the materiality threshold used to identify material misstatements D. Other matters affecting the client, such as substantial doubt about the entity's ability to continue as a going concern

C

72. During the year under audit, Forrest Corporation experienced significant losses due to a pervasive fraud scheme. Because of the lack of documentary evidence and inability to perform appropriate auditing procedures, the auditors were unable to determine the total amount of the loss. What type of report should the auditors issue? A. Qualified or adverse opinion B. Disclaimer or adverse opinion C. Disclaimer or qualified opinion D. Unmodified opinion with an other-matter paragraph

C

76. Holmes, CPA, assisted Williams Corporation in preparing its financial statements and gave Williams permission to use Holmes's name in communications containing these financial statements. If Holmes did not audit the financial statements, what type of opinion should be expressed? A. Unmodified opinion with an other-matter paragraph limiting the level of assurance provided by Holmes B. Qualified opinion with an additional paragraph indicating a circumstance-imposed scope limitation C. Disclaimer of opinion because Holmes did not audit the financial statements D. Homes is not required to issue a report or opinion in this situation

C

78. Harris & Thompson were engaged to audit Smart Corp's comparative financial statements for the years ended December 31, Year 1 and Year 2. The Year 1 financial statements were presented in accordance with generally accepted accounting principles, but the Year 2 financial statements were determined to be materially misstated. As a result, Harris & Thompson should A. issue a qualified opinion on the comparative financial statements as a whole. B. issue an unmodified opinion on the Year 1 financial statements and disclaim an opinion on the Year 2 financial statements. C. issue an unmodified opinion on the Year 1 financial statements and a qualified opinion on the Year 2 financial statements. D. reissue the previous opinion on the Year 1 financial statements and withdraw from the engagement.

C

82. When other information is presented in a document with audited financial statements, the auditors' report should A. state that the auditor read the other information for inconsistencies and misstatements with the financial statements and identified no discrepancies. B. provide limited assurance as to whether the other information is presented in accordance with generally accepted accounting principles. C. reference the other information only if inconsistencies or material misstatements are identified between this information and the financial statements. D. be expanded to express an opinion that the other information is consistent with the financial statements and not materially misstated.

C

When auditors are engaged to examine an entity's financial statements but decide to issue a disclaimer of opinion because of a scope limitation, the report would not A. identify management's responsibility for the financial statements. B. refer to any scope limitation in an additional paragraph. C. modify the Auditor's Responsibility section to identify the basis for the disclaimer. D. indicate that the auditors were engaged to audit the financial statements.

C

Which of the following situations would not result in auditors adding an additional paragraph to their report without modifying the introductory, scope, or opinion paragraphs of that report? A. Reference to a change in the method of accounting mandated by the issuance of a new accounting standard. B. Reference to a going-concern uncertainty facing the entity. C. Reference to a departure from GAAP that is material, but not pervasive, to the financial statements. D. Reference to an acquisition made by the entity during the most recent fiscal year.

C

31. The auditors include an emphasis-of-matter paragraph in an otherwise unmodified report on the entity's financial statements to emphasize that the entity being reported on had significant transactions with related parties. The inclusion of this separate paragraph A. is considered a qualification of the opinion. B. violates generally accepted auditing standards if this information is already disclosed in footnotes to the financial statements. C. necessitates a revision of the opinion paragraph to include the phrase "with the foregoing explanation." D. is appropriate and would not otherwise affect the unmodified opinion.

D

33. When financial statements contain a departure from GAAP, the auditors should explain the unusual circumstances in a separate paragraph and express an opinion that is A. unmodified. B. qualified. C. adverse. D. qualified or adverse, depending on the overall materiality and pervasiveness of the GAAP departure.

D

4. Auditors are required to reference consistency in their report when there are changes in A. accounting estimates. B. the format of the Statement of Cash Flows. C. the classification of financial statement amounts. D. accounting principles.

D

45. Which of the following is not an appropriate reporting option when component auditors are involved in the audit of group financial statements, assuming that the component auditors' work did not identify any issues affecting the group auditors' report? A. Issue a standard (unmodified) report that does not reference any involvement by the component auditors. B. Identify the component auditors by name and present their report along with the group auditors' report. C. Refer to the component auditors' work and disclose the extent of their work in the group auditors' report. D. Disclaim an opinion on the portion of the financial statements examined by the component auditors.

D

15. The auditors conclude that there is a material inconsistency in the "other information" in an annual report to shareholders containing audited financial statements. If the auditors conclude that the financial statements do not require revision, but the entity refuses to revise or eliminate the material inconsistency, the auditors may A. issue a qualified opinion on the entity's financial statements, citing a departure from generally accepted accounting principles. B. consider the matter closed since the other information is not included in the audited financial statements. C. issue an adverse opinion on the entity's financial statements due to inadequate disclosure. D. revise the report on the entity's financial statements to include an other-matter paragraph describing the material inconsistency.

D

17. In which of the following circumstances would a qualified opinion not be appropriate? A. A scope limitation prevents the auditors from completing an important auditing procedure. B. The entity has failed to properly disclose going-concern uncertainties. C. An accounting principle at variance with generally accepted accounting principles is used. D. The auditors lack independence with respect to the audited entity.

D

19. When auditors qualify their opinion on the entity's financial statements because of inadequate disclosure, the auditors should describe the nature of the omission in an additional paragraph and modify A. the introductory paragraph and Auditor's Responsibility sections. B. the introductory paragraph only. C. the Auditor's Responsibility section only. D. neither the introductory paragraph nor Auditor's Responsibility section.

D

25. Independent auditors must consider whether the entity has the ability to continue as a going concern. If a substantial doubt exists but disclosure is adequate and no other basis exists for modifying the report, the auditors would normally A. disclaim an opinion. B. express an adverse opinion. C. qualify the opinion. D. express an unmodified opinion with an emphasis-of-matter paragraph describing the going-concern uncertainty.

D

26. Auditors most likely would issue a disclaimer of opinion on the entity's financial statements because of A. inadequate disclosure of material information. B. the omission of the Statement of Cash Flows. C. a material departure from generally accepted accounting principles. D. management's refusal to furnish written representations.

D

29. When audited financial statements are presented in a document containing other information, the auditors should A. perform inquiry and analytical procedures to ascertain whether the other information is reasonable. B. add an emphasis-of-matter paragraph to the auditors' report without modifying the opinion on the financial statements. C. perform the appropriate substantive procedures to corroborate the other information. D. read the other information to determine that it is consistent with the audited financial statements.

D

46. Which of the following best describes the auditors' responsibility when financial statements are presented in comparative format? A. The auditors' report must only refer to the current year's financial statements. B. The auditors' report must only refer to the prior years' financial statements if they were audited by the current auditor. C. The auditors' report must only refer to the prior years' financial statements if they were audited by either the current auditors or predecessor auditors. D. The auditors' report must refer to all financial statements presented in comparative form, regardless of whether they have been audited by the current auditors or predecessor auditors.

D

57. A client has capitalizable leases but refuses to capitalize them in the financial statements. Which of the following reporting options does an auditor have if the amounts pervasively distort the financial statements? A. Qualified opinion B. Unmodified opinion C. Disclaimer of opinion D. Adverse opinion

D

61. An entity's comparative financial statements include the financial statements of the prior year that were audited by a predecessor auditor whose report is not presented. If the predecessor's report was qualified, the successor should A. issue an updated comparative report indicating the involvement of component auditors. B. explain to the client that comparative financial statements may not be presented under these circumstances. C. express an opinion only on the current year's financial statements and make no reference to the prior-years' statements. D. indicate the substantive reasons for the qualification in the predecessor auditors' opinion.

D

63. An auditor concludes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. The entity's financial statements adequately disclose its financial difficulties. Under these circumstances, the auditor's report is required to include an emphasis-of-matter paragraph that specifically uses the following phrase(s). "Except for the Effects of Such Adjustments" "Possible Discontinuance of the Entity's Operations" A. Yes, Yes B. Yes, No C. No, Yes D. No, No

D

65. When qualifying an opinion because of an insufficiency of audit evidence, an auditor should refer to the situation in the Auditor's Responsibility Section Notes to the Financial Statements A. Yes, Yes B. Yes, No C. No, Yes D. No, No

D

67. SEC registrants' financial statements should be accompanied by all of the following reports except A. auditors' report on internal control over financial reporting. B. management's report on internal control over financial reporting. C. auditors' report on financial statements and related disclosures. D. management's report on financial statements and related disclosures.

D

70. Management determined it was probable that a pending litigation claim would result in a material loss. The loss was disclosed in the footnotes to the financial statements but was not accrued in the income statement. If the auditors believe an accrual should be made, what type of report should be issued? A. Standard (unmodified) report B. Unmodified opinion with an emphasis-of-matter paragraph C. Qualified opinion based on a circumstance-imposed scope limitation D. Qualified or adverse opinion based on a departure from GAAP

D

80. When a previously expressed opinion is updated from qualified to unmodified, the auditors' report on comparative financial statements should A. not modify the previously expressed opinion or refer to factors affecting the opinion on the prior-years' financial statements. B. update the opinion expressed on the prior-years' financial statements but provide no explanation for the updated opinion. C. not modify the previously expressed opinion but include a reference to the footnote describing the factors affecting the opinion on the prior-years' financial statements. D. update the previously expressed opinion and explain the reasons for the change, including a reference to the footnote describing the change.

D

81. When reporting on financial statements that include only summarized totals of account balances, the auditors' conclusion should state whether the information in the summary financial statements A. is complete with respect to disclosures required by the SEC. B. is fairly stated, in all material respects, in accordance with generally accepted accounting principles. C. is consistent, in all material respects, with the prior-years' summary financial statements. D. is fairly stated, in all material respects, in relation to the complete financial statements.

D

84. The standard (unmodified) report issued in the audit of a nonpublic entity includes a(n) A. management's responsibility section providing a general description of an audit conducted in accordance with the applicable auditing standards. B. introductory paragraph identifying the responsibility of management and auditors in the financial reporting process. C. internal control paragraph indicating the effectiveness of the entity's internal control over financial reporting. D. opinion paragraph providing the auditors' conclusion as to the fair presentation of the financial statements.

D

13) Attestation engagements may be more difficult than financial statement audits when: a. the establishment of suitable measurement criteria is difficult b. internal controls are difficult to assess c. management may not understand the underlying assumptions of the attestation d. the report may be submitted to individuals with insufficient knowledge of the nature of an attestation engagement

a

26) Which of the following procedures is ordinarily performed by an accountant in a compilation engagement of a nonpublic entity? A) Reading the financial statements to consider whether they are free of obvious mistakes in the application of accounting principles. B) Obtaining written representations from management indicating that the compiled financial statements will not be used to obtain credit. C) Making inquiries of management concerning actions taken at meetings of the stockholders and the board of directors. D) Applying analytical procedures designed to corroborate management's assertions that are embodied in the financial statement components.

a

32. In an audit of contingent liabilities, which of the following procedures would be least effective? A. Examining customer confirmation replies B. Reviewing a bank confirmation letter C. Examining invoices for professional services D. Reading the minutes of the board of directors meetings

a

39. Following the audit report release date, auditors became aware of facts existing at the report date that would have affected the reports had auditors then been aware of such facts. What is the most appropriate initial course of action that auditors should take? A. Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information. B. Request that management disclose the newly-discovered information by issuing revised financial statements. C. Issue revised pro forma financial statements taking into consideration the newly discovered information. D. Give public notice that auditors are no longer associated with financial statements.

a

40) Which of the following account titles would not be appropriate for a company that prepared its financial statements using the tax basis of accounting? A) Balance Sheet. B) Statement of Assets, Liabilities, and Owner's Equity. C) Statement of Revenue and Expenses. D) Statement of Change in Partners' Capital Accounts.

a

40. Analytical procedures performed near the end of an audit generally include A. considering unusual or unexpected account balances that were not previously identified. B. performing tests of transactions to corroborate management's financial statement assertions. C. gathering evidence concerning account balances that have not changed from the prior year. D. retesting control activities that appeared to be ineffective during the assessment of control risk.

a

48) An auditor that is requested to provide a report on application of requirements of an appropriate financial reporting framework may not: A) issue an opinion on the accounting treatment of a hypothetical transaction. B) discuss the requirements with the client's current auditors. C) limit the report to the sole use of specified parties. D) state that differences in facts, circumstances, or assumptions might change the conclusion.

a

51. If the date of an entity's financial statements is December 31, the date of the auditor's report is February 20, and the audit report release date is February 22, which of the following is considered a subsequent event? A. A significant acquisition that was announced on February 1 and will be finalized on October 1. B. A court settlement on March 3 related to a case that was pending on December 31. C. Losses from the devaluation of a foreign currency that became finalized on February 21. D. The entity's announcement of a major restructuring plan on December 30 that will be implemented during the upcoming year.

a

6) What is the appropriate name for an assurance service provided by a CPA regarding a client's commercial Internet site with reference to the principles of privacy, security, processing, integrity, availability, and confidentiality? a. WebTrust b. SysTrust c. XBRL d. WebSecure

a

6. Which of the following would not ordinarily be considered when using analytical procedures to verify the overall reasonableness of revenue and expense accounts? A. Current-year recorded (unaudited) balances B. Expected balances using a statistical analysis or relationships among accounts C. Internal budgets and reports D. Prior-year balances

a

15. What is the primary purpose of obtaining written representations? A. To provide auditors with substantive evidence of important assertions B. To impress upon management its primary responsibility for the financial statements C. To allow auditors to communicate important internal control deficiencies to management D. To allow auditors to communicate important suggestions for improvement to management

b

18) In an agreed-upon procedures engagement, an accountant: A) follows all of the fundamental principles of GAAS. B) restricts the report to specified users. C) includes negative assurance in the report. D) gives a qualified audit report.

b

18. Why is it the client's decision to record adjustments to the financial statements? A. Having auditors adjust the financial statements would impair independence with respect to the client. B. The financial statements are the responsibility of the client's management. C. Auditors often do not have sufficient client-specific expertise to record adjustments to the financial statements. D. The client will ultimately suffer any losses related to misstated financial statements.

b

19) Which of the following procedures should an accountant perform during an engagement to review the financial statements of a nonpublic entity? A) Communicate reportable conditions discovered during the assessment of control risk. B) Obtain a client representation letter from members of management. C) Send bank confirmation letters to the entity's financial institutions. D) Examine cash disbursements in the subsequent period for unrecorded liabilities.

b

35. Long and Short, CPAs, were auditing Island Corporation for the year ended December 31, 2014. On January 11, 2015, a major customer of Island Corporation declared bankruptcy as the result of an uninsured loss due to a major fire in their warehouse on January 8, 2015. As a result, a material accounts receivable from the customer was determined to be uncollectible. Long and Short, CPAs, would expect the client to A. record the loss on uncollectible accounts as a routine transaction in the year 2015. B. treat the loss as a subsequent event and provide a footnote about the loss in the 2014 financial statements. C. treat the loss as a subsequent event and adjust the 2014 financial statements to record the loss on uncollectible accounts. D. file a lawsuit against the customer in hopes of collecting some of the money owed to the client.

b

36) In a compilation engagement: A) all appropriate disclosures must be presented. B) managers or owners may choose to omit all the footnote disclosures. C) financial statements must be presented in prescribed forms. D) an auditor provides only negative assurance.

b

38) When interim financial information is presented as supplementary information accompanying audited financial statements, the auditor should make reference to the information: A) in all cases. B) when it has not been labeled as "unaudited". C) when it is material to the financial statement users. D) when the information has been reviewed rather than audited.

b

41) When a company uses a service organization to prepare its payroll, the company's auditors: A) have no obligation concerning the internal controls at the service organization. B) need to understand the internal controls over the transaction regardless of the location of the control. C) must audit the internal controls at the service organization. D) should include the audit report of the service company's auditors with their auditors' report.

b

52. Which of the following auditing procedures most likely would assist auditors in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern? A. Inspecting title documents to verify whether any assets are pledged as collateral B. Confirming with third parties the details of arrangements to maintain financial support C. Reconciling the client's cash balance with the cut-off bank statement and the bank confirmation D. Comparing the entity's depreciation and asset capitalization policies to other entities in the industry

b

5. Which of the following best describes the auditors' responsibility with respect to management's estimates? A. Verifying the mathematical accuracy of management estimates B. Assessing the likelihood that actual results will be consistent with management's estimates C. Evaluating the reasonableness of management's estimates D. Identifying how the failure of the entity to achieve management's estimates will influence users' decisions

c

16) Which of the following procedures would not be performed in a review of financial statements of a nonpublic company? a. inquire about the accounting system and bookkeeping procedures b. perform analytical procedures to identify relationships and individual items that appear to be unusual c. obtain an attorney's letter regarding litigation and unasserted claims d. study the financial statements for indications that they conform to generally accepted accounting principles

c

16. If auditors are appointed on January 3, 2014, the date of the financial statements is December 31, 2014, the date of the auditors' report is February 7, 2015 and the audit report release date is March 3, 2015, what is the appropriate date of the written representations? A. January 3, 2014 B. December 31, 2014 C. February 7, 2015 D. March 3, 2015

c

17. Which of the following reporting options is available if the client refuses to provide auditors with written representations? A. Unmodified or qualified opinion B. Qualified or adverse opinion C. Qualified opinion or disclaimer of opinion D. Disclaimer of opinion or adverse opinion

c

2. Interim testing normally occurs between the ____ and the ____. A. beginning of the year under audit; audit report release date B. date of the financial statements; audit report release date C. beginning of the year under audit; date of the financial statements D. end of the year under audit; date of the auditors' report

c

29) Hamell Corporation is making a presentation to a prospective investor. The presentation includes a projection showing that the company's sales will be between $25,000,000 and $27,000,000 within the next three years. Hamell believes the information will be better received if its CPA provides an attestation report on the projection. In order to provide such a report the CPA must do all of the following except: A) obtain knowledge about the client's business. B) evaluate the assumptions used in preparing the projection. C) confirm expected sales with customers. D) identify key factors affecting the information.

c

50) A preparation of financial statements engagement might include all of the following except A) Preparation of financial statements prior to review by another accountant. B) Preparation of financial statements to be presented alongside an entity's tax return. C) Preparation of financial statements solely for submission to a taxing authority. D) Preparation of financial statements for presentation alongside a personal financial plan.

c

29. Auditors must complete various phases of an audit after the date of the financial statements. The auditors' responsibility for matters affecting the client extends from the date of the financial statements to the A. date of the auditors' report. B. final review of the audit documentation. C. audit report release date. D. delivery of the auditors' reports to the client.

c

3) Many individuals are apprehensive about using the Internet to purchase items. This apprehension mainly arises from users' concerns about: a. the reliability of computer technology. b. the time delays in Internet purchases. c. a lack of security for information transmitted over the internet. d. the lack of CPA involvement in Internet company financial information.

c

42) Auditors can gain sufficient understanding of the internal controls at a service organization by: A) reviewing the contract with the service organization. B) inquiry with management of the service organization. C) reviewing a report on internal controls provided by the service organization's auditors. D) sending a confirmation concerning internal controls to the service organization's auditors.

c

43) A report on an entity's internal control over financial reporting: A) is required for all companies whether they report to the SEC or not. B) is optional for all companies whether they report to the SEC or not. C) is required by the PCAOB for large public companies and may be performed by a CPA for nonpublic companies. D) is limited to inquiry and analytical procedures for reports for non-SEC companies.

c

45) During a review the auditor is required to obtain written representations from management. Which of the following is not one of the required elements of the representation? A) Management's responsibility for the fair presentation of the financial statements. B) Management's belief that it has answered all inquiries fully and truthfully. C) Management has made all adjustments identified during the review. D) Management has disclosed information about subsequent events.

c

7) At a minimum, in order to comply with PCAOB AS 2201, an auditor of a public company that has material transactions processed by a service organization would have to request from the service organization A) a description of its internal controls. B) a type one service auditors' report. C) a type two service auditors' report. D) a Service Organization Control (SOC) 3 report.

c

7) Extensible Business Reporting Language (XBRL) provides a computer readable identifying tag for each individual form of data. The advantages of XBRL include all of the following except: a. increases the speed of handling of financial data b. reduces the chance of error c. improves the full disclosure of financial information d. permits automatic checking of information

c

1) The AICPA Assurance Services Executive Committee identified five megatrends that can affect public accounting firms' business. Which of the following is not one of the megatrends they identified? a. information technology. b. the shift from the industrial age to the knowledge age. c. globalization. d. merging of corporations creating fewer audit opportunities.

d

10. Which of the following procedures is not used in auditors' examination of litigation, claims, and assessments? A. Obtaining a description and evaluation of litigation, claims, and assessments from management B. Examining documentary evidence regarding litigation, claims, and assessments C. Reading minutes of meetings of stockholders, directors, and appropriate committees D. Performing analytical procedures

d

14. Which of the following items would appear in written representations in the audit of a public entity but not a nonpublic entity? A. Statements related to management's responsibility for the entity's financial statements B. Statements related to management's responsibility for designing internal control to prevent and detect fraud C. An indication that all subsequent events have been disclosed to the auditors D. Management's opinion as to the effectiveness of its internal control over financial reporting

d

19. Which of the following is not a purpose of the review of audit documentation by a supervisor during fieldwork? A. To ensure that all appropriate steps in the audit plan were performed B. To ensure that referencing among audit documentation is clear C. To ensure that the explanations included in the audit documentation are understandable D. To ensure that the overall scope of the audit was appropriate

d

27) In reporting on a nonpublic entity's internal control over financial reporting, an accountant should include a paragraph that describes the: A) documentary evidence regarding the control environment factors. B) changes in the entity's internal control since the prior report. C) potential benefits from the accountant's suggested improvements. D) inherent limitations of internal control.

d

30. Auditors conclude that the omission of a substantive procedure considered necessary at the time of the examination may impair their present ability to support the previously-expressed opinion. Auditors need not try to perform the omitted procedure if A. the risk of adverse publicity or litigation is low. B. some financial statement users are currently relying on the auditors' reports. C. the auditors' opinion was qualified because of a departure from generally accepted accounting principles. D. the results of other procedures that were applied at the time compensated adequately for the omitted procedure by providing sufficient appropriate evidence.

d

33. Near the end of an audit, the application of analytical procedures is A. recommended by auditing standards. B. not mentioned by auditing standards. C. not useful, since detailed substantive procedures have already been performed. D. required by auditing standards.

d

35) In a compilation engagement, the accountant: A) provides reasonable assurance that no material misstatements exist. B) provides assurance that no material misstatement came to the auditors attention. C) provides a list of procedures performed and results found. D) does not express an opinion.

d

36. Small and Tall, CPAs completed the December 31, 2014 audit of Big Company on February 10, 2015. After the audit report release date, an outstanding lawsuit against Big Company was settled for materially more than recorded in the December 31, 2014 financial statements. The amount recorded in the financial statements represented the best estimate of management and the company's attorneys at the time the audit was completed. Based on this new information, Small and Tall, CPAs should A. determine whether persons are currently relying on the auditors' reports. B. advise the client to make appropriate changes in the financial statements and reissue them. C. notify each member of the board of directors of Big Company. D. take no action since the event took place after the audit report release date.

d

38. An entity's income statements were misstated due to the recording of journal entries that involved debits and credits to an unusual combination of expense and revenue accounts. Auditors most likely could have detected this irregularity by A. tracing a sample of journal entries to the general ledger. B. evaluating the effectiveness of the internal control policies and procedures. C. investigating the reconciliations between controlling accounts and subsidiary records. D. performing analytical procedures designed to disclose differences from expectations.

d

43. Which of the following procedures would auditors most likely perform in obtaining evidence about subsequent events? A. Determine that changes in employee pay rates after year end were properly authorized. B. Recompute depreciation charges for plant assets sold after year end. C. Inquire about payroll checks that were recorded before year end but cashed after year end. D. Investigate changes in long-term debt occurring after year end.

d

44) During a review engagement, which of the following is not a required inquiry of management? A) The accounting principles and practices used. B) Significant transactions occurring near the end of the reporting period. C) Status of uncorrected misstatements identified in previous engagements. D) The changes made to internal controls during the period under review.

d

44. Which of the following best describes auditors' responsibilities with respect to evaluating the going-concern status of the entity? A. Auditors are required to specifically gather evidence with respect to going-concern status and separately report on the entity's ability to continue as a going concern. B. Auditors are required to specifically gather evidence with respect to going-concern status and modify their report on the financial statements if substantial doubts exist. C. Auditors are required to consider evidence obtained during the audit that may provide information with respect to going-concern status and separately report on the entity's ability to continue as a going concern. D. Auditors are required to consider evidence obtained during the audit that may provide information with respect to going-concern status and modify their report on the financial statements if substantial doubts exist.

d

48. What course of action should auditors take if, after evaluating management's plan to mitigate the effect of factors that suggest going-concern uncertainties, they believe that substantial doubt about going concern does not exist? A. Modify their report on the financial statements to describe management's plan to mitigate going-concern uncertainties, the procedures performed by the auditors, and indicate that substantial doubt about going concern does not exist. B. Prepare a separate report that describes management's plan to mitigate going-concern uncertainties, the procedures performed by the auditors, and indicate that substantial doubt about going concern does not exist. C. Require financial statement disclosure of management's plan to mitigate going-concern uncertainties with no modification to the auditors' report on the financial statements or no separate report on going concern. D. Conclude that substantial doubt about going concern does not exist and not require financial statement disclosure or modification of the auditors' report.

d

50. Assume that Rory is auditing the financial statements of Augusta Inc. Rory completes his fieldwork on February 25 and his report (along with Augusta's financial statements) is issued on March 1. On March 3, a hurricane destroys a warehouse that contains a significant amount of uninsured inventory. Which of the following best describes Rory's responsibility with respect to the effects of this hurricane on Augusta's financial statements? A. Because the inventory was included in the financial statements audited by Rory, he is required to perform additional procedures and reissue his report on the revised financial statements. B. Because the hurricane occurred after the date of Rory's report, he has no responsibility to perform additional procedures or reissue his report. C. Because the hurricane occurred prior to the next fiscal quarter, Rory is required to perform additional procedures and reissue his report on the revised financial statements. D. Because the hurricane occurred after the release of the financial statements and Rory's report, he has no responsibility to perform additional procedures or reissue his report.

d

8) Enhanced Business Reporting (EBR) focuses on improving business reporting by developing a voluntary framework for presentation and disclosure of value drivers and non-financial measures of performance. The advantages of EBR include all of the following except: a. more efficient and effective regulatory process b. reduced financing costs for companies c. better allocation of capital by investors d. better footnote disclosure in the companies' SEC filings

d