Audit Exam 4
In which of the following engagements would general use of the accountants' report be appropriate?
Examination of financial forecast.
Which of the following procedures would auditors most likely perform in obtaining evidence about subsequent events?
Investigate changes in long-term debt occurring after year end.
Which of the following subsequent events would represent an event that provides information about conditions that arose following the date of the financial statements?
Loss of inventory as a result of a flood.
Which of the following scope limitations would ordinarily be of most concern to the auditors?
Management's refusal to provide auditors with written representations.
Which of the following represents the level of assurance provided in a compilation engagement on a non-issuer's financial statements?
No opinion or assurance on the fairness of the financial statements.
Which of the following procedures should an accountant perform during an engagement to review the financial statements of a non-issuer?
Obtain a representation letter from members of management.
Which of the following procedures would not be performed in a review of financial statements of a non-issuer?
Obtain an attorney's letter regarding litigation and unasserted claims.
Which of the following in normally the last step in the audit process?
Obtaining a signed management representation letter.
Restrictions imposed by an entity prohibited the observation of physical inventories, which accounted for 35 percent 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 disclaimer of opinion on the entity's financial statements.
Auditors will issue an adverse opinion when
a violation of generally accepted accounting principles is sufficiently material and pervasive that a qualified opinion is not justified.
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
audit report release date
Auditors have a responsibility to evaluate whether financial statements properly reflect all known events through the:
audit report release date.
To whom should written representations be addressed?
auditors
Auditors determine that the possible effects on the financial statements of the inability to obtain sufficient evidence (i.e. a scope limitation) could be both material and pervasive
disclaimer of opinion
Compilations can omit substantially all _________.
disclosures
Changes in accounting estimates ______ result in an explanatory paragraph.
do not
Review reports ______ result in an opinion like audit reports.
do not
Limited assurance is also called ______ assurance.
negative
Type 2 subsequent events occur after the balance sheet date but ____ the completion of fieldwork.
prior to
Near the end of an audit, the application of analytical procedures is
required by auditing standards.
Which of the following statements is not included in the Auditor's Responsibilities for the Audit of the Financial Statements Section of the standard (unmodified) report?
"In accordance with accounting principles generally accepted in the United States of America."
Which of the following lawyer responses from an attorney letter would cause the auditor to gather additional information?
"The client has a good plan for responding to the threatened litigation. We will know more soon."
Which of the following statements is not included in the Basis for Opinion Section of the standard (unmodified) report on the entity's financial statements?
"We are required to communicate with those charged with governance..."
Which of the following is typically not included in the inquiry letter sent to the client's attorneys?
A disclaimer regarding the likelihood of settlement of pending litigation.
Limitations on the scope of an audit may create a situation in which the auditors are unable to obtain sufficient ________.
Evidence
Which of the following would an auditor LEAST LIKELY perform to obtain evidence about contingent liabilities?
Scanning revenue accounts for debit entries.
What is the primary purpose of obtaining written representations?
To impress upon management its primary responsibility for the financial statements.
Which of the following is the main reason auditors are required to obtain and written management representation letter from the client?
To make sure management understands that they have the ultimate responsibility for the financial statements.
Which of the following best describes why an auditor performs analytical procedures at the end of the audit engagement?
To provide an overall review of the financial statements and the adequacy of the evidence gathered in response to the risks.
Type 1 or Type 2? A lawsuit that was in progress as of year-end was settled shortly thereafter
Type 1
Type 1 or Type 2? During the audit, a customer with a large A/R balance at year-end declares bankruptcy
Type 1
Type 1 or Type 2? additional evidence about conditions that existed at the balance sheet date
Type 1
Which of the following would least likely be communicated to the board of directors at the end of the audit?
Whether the audit fee was adequate to cover the CPA firms cost of providing the audit.
An engagement quality review by a second partner of the audit documentation and financial statements is performed to ensure that the:
audit work meets the quality standards of the firm.
What is the reason of this EOM paragraph? as discussed in Note XXX to the financial statements, the Company is a defendant in a lawsuit
auditor discretionary circumstances
Which of the following is not an example of an attestation engagement: a) An audit engagement conducted on historical financial statements. b) A compilation engagement conducted on historical financial statements. c) An examination engagement conducted on a financial forecast. d) An engagement to apply limited procedures identified by the client to historical financial statements.
b) A compilation engagement conducted on historical financial statements.
In an agreed-upon procedures engagement, an accountant: a) follows all of the fundamental principles of GAAS. b) may restrict the use of the report to specified users. c) expresses limited assurance in the report. d) expresses a qualified audit opinion.
b) may restrict the use of the report to specified users.
Auditors may accept an engagement and express an unmodified opinion on an element, account, or item of the financial statements if they:
conduct the engagement in accordance with generally accepted auditing standards.
If a material departure is not ______, the report needs to be modified.
corrected
Auditors most likely would issue a disclaimer of opinion on the entity's financial statements because of
management's refusal to furnish written representations.
Qualified opinions are issued when the financial statements are ________ misstated.
materially
Auditors are _____ required to perform procedures specifically designed to test the going concern assumption.
not
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
not mention the alternative procedures
A going concern evaluation should include evaluation of ________ from the balance sheet date.
one year
"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, 20x1..." is an illustration of a
report with a consistency modification.
A(n) _______ report includes the wording that 'we are not aware of any material modifications...'
review
A(n) ____is generally limited to inquiry and analytical procedures.
review
The issuance of a disclaimer of opinion generally indicates
the auditors cannot form an opinion on the fairness of presentation of the financial statements as a whole.
Auditors would not normally issue a qualified opinion on the entity's financial statements when
the auditors lack independence with respect to the audited entity.
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
the results of other procedures that were applied at the time compensated adequately for the omitted procedure by providing sufficient appropriate evidence.
Auditors have doubt about a company's ability to continue as a going concern
unqualified opinion with an EOM paragraph
Reviewers are concerned that the ________ all tie together.
working papers
Which of the following procedures is not used in auditors' examination of litigation, claims, and assessments?
Performing analytical procedures.
Which of the following procedures would auditors most likely perform to obtain evidence about the occurrence of subsequent events?
Reading minutes of meetings of owners, management, or those charged with governance held after the date of the financial statements.
Which of the following procedures is ordinarily performed by an accountant in a compilation engagement of a non-issuer?
Reading the financial statements to consider whether they are free of obvious mistakes in the application of accounting principles.
Accountants are permitted to express limited assurance in which of the following reports?
Review report on unaudited financial statements.
Which of the following is the primary procedure use by an auditor to search for subsequent events?
Review subsequent financial statements and financial reports prepared after the entity's year end.
Which of the following subsequent events would most likely require an entity to record an adjustment to its 12/31 financial statements?
Settlement of litigation in February for a legal issue that occurred in December.
Which of the following would not be communicated to users in the auditors' report on an entity's financial statements and related disclosures?
Specific details regarding the audit examination, such as the materiality threshold used to identify material misstatements.
In which of the following circumstances would auditors most likely add an emphasis-of-matter paragraph or additional section to the standard (unmodified) report without modifying the opinion on the entity's financial statements?
There is substantial doubt about the entity's ability to continue as a going concern.
Type 1 or Type 2? A flood damages a significant portion of the operating facility after year-end
Type 2
Type 1 or Type 2? Conditions that have come into existence after the balance sheet date
Type 2
To perform an attestation engagement on prospective financial information, accountants must do all of the following except
Understand the internal controls used in the processes that generated the prospective financial information.
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
considering the adequacy of disclosure about the client's possible inability to continue as a going concern.
Reviewers are concerned if immaterial passed misstatements have a ______ material effect.
cumulative
Subsequent events need to be disclosed in the financial statements; otherwise, the financial statements would be_______.
misleading
In a review, practitioners gather sufficient evidence to drive risk to a(n) _______ level.
moderate
A going concern is to be evaluated for a period not to exceed _________ beyond the date of the financial statements.
one year
An emphasis-of-matter paragraph always follows the ______ paragraph.
opinion
Each ______ of the compiled financial statements should be marked "see accountant's compilation report."
page
At a minimum, the accountants must _____ the financial statements.
read
SSARS Review: Other Review Procedure
read financial statements read the minutes of the board meetings
Analytical procedures performed near the end of an audit generally include
considering unusual or unexpected account balances that were not previously identified.
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
contact the component auditors' and review the audit programs and working papers pertaining to the subsidiary.
Subsequent events occur between the __________ and the __________.
date of the financial statements; date of the auditors' report
SSARS Review: Inquiry of Management
determine status of unrecorded adjustments inquire as to the accounting principles, practices and methods used inquire as to communications from regulatory agencies
In addition to an emphasis-of-matter paragraph, auditors could issue a(n) _________ in a going concern situation.
disclaimer
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)
disclaimer of opinion.
A report that acknowledges reliance on the reports of component auditors is a type of report modification known as a(n)
division of responsibility.
In a compilation engagement, the accountant:
does not express an opinion
When a review is performed, ______ page of the company's financial statements should be marked "See independent accountants' review report".
each
If substantial doubt about a going concern exists, an ______ paragraph is the most common resolution.
emphasis-of-matter
Managers and partners typically review at the _____ of the engagement timeline.
end
Working papers are reviewed at ______ supervisory level(s) of a CPA firm.
every
Type 1 subsequent events come into existence due to new ______becoming available.
evidence
When items are identified that affect the going concern assumption, auditors must gather ________.
evidence
What is the reason of this EOM paragraph? as discussed in Note XXX to the financial statements, the company adopted SFAS XXX as of December 31, 20XX. Our opinion is not modified with respect to this matter
principles not consistently applied
Review Service
provides a limited degree of assurance; primarily performs analytical procedures and inquiries of client
Agreed-Upon Procedures Engagement Service
provides a summary of findings to his clients based on procedures agreed upon with the financial statement user
Examination Service
provides reasonable assurance that the amounts in the financial statements are materially correct
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)
qualified opinion or an adverse opinion.
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
qualified or adverse, depending on the overall materiality and pervasiveness of the GAAP departure.
Concurring partners are often concerned with _____ control standard compliance.
quality
On March 15, 2021, Kent, CPA, issued an unqualified opinion on a client's audited financial statements for the year ended December 31, 2020. On May 4, 2021, 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
undertake to apply alternative procedures that would provide a satisfactory basis for the opinion.
An engagement in which accountants perform procedures delineated by the entity is referred to as a(n):
Agreed-upon procedures engagement.
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 change in the entity's form of reporting entity.
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 significant acquisition that was announced on February 1 and will be finalized on October 1.
Which of the following statements should be included in a practitioners' report on the application of agreed-upon procedures?
A statement referring to standards established by the AICPA.
Which of the following best describes the auditors' responsibility with respect to management's estimates?
Evaluating the reasonableness of management's estimates.
Which of the following represents a major difference between a compilation engagement and a preparation engagement?
Accountants are required to prepare a report in a compilation engagement, but not a preparation engagement.
Which of the following would not be included in an auditors' report on financial statements prepared using a special purpose framework?
An opinion on the appropriateness of the special purpose framework.
Which of the following statements would not be included in an accountants' report on an examination of a financial forecast?
An opinion on the likelihood of achieving the forecasted results.
After the auditor's released the audit report, they realized they failed to perform an important audit procedure. What would most likely be the auditor's initial response?
Determine whether the audit procedure is needed to support the audit opinion.
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?
Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information.
Auditors _____ an opinion when they are unable to form an opinion.
Disclaim
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?
Disclaimer of opinion or qualified opinion.
When there is significant doubt as to the ability to continue as a going concern, a(n) _________ paragraph may be added.
Emphasis of Matter (EOM)
If auditors are appointed on January 3, 2020, the date of the financial statements is December 31, 2020, the date of the auditors' report is February 7, 2021, and the audit report release date is March 3, 2021, what is the appropriate date of the written representations?
February 7, 2021
For each of the communications listed below, select the appropriate time period during which the communication is typically obtained or provided and whether the communication is oral, written, or either oral or written. Communications with individuals charged with governance
Following the date of the auditors' report; Either oral or written
The suitable criteria in a financial statement audit are set forth in the financial reporting framework selected by management, often ____________.
GAAP
Which of the following would likely be the response of the auditors when a client is showing financial distress?
Gain an understanding from management as to their response plans and assess the likelihood that the plan will be successful.
For each of the communications listed below, select the appropriate time period during which the communication is typically obtained or provided and whether the communication is oral, written, or either oral or written. Attorney Letter Response
Prior to or at the date of the auditors' report, Written
For each of the communications listed below, select the appropriate time period during which the communication is typically obtained or provided and whether the communication is oral, written, or either oral or written. Written Representations
Prior to or at the date of the auditors' report, Written
If financial statements contain a material but non-pervasive departure from generally accepted accounting principles, the auditors should render a(n)
Qualified opinion with reference to departure.
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?
Qualified or adverse opinion based on a departure from GAAP.
During a review engagement, which of the following is not a required inquiry of management?
The changes made to internal controls during the period under review.
In which of the following circumstances may auditors issue the standard (unmodified) report on the entity's financial statements?
The entity changed accounting principles having an immaterial effect on the entity's financial position, results of operations, and cash flows.
In which of the following circumstances would auditors be most likely to express an adverse opinion?
The financial statements are not in accordance with generally accepted accounting principles regarding the capitalization of leases.
Why is it the client's decision to record adjustments to the financial statements?
The financial statements are the responsibility of the client's management.
Under which of the following circumstances would a disclaimer of opinion on the entity's financial statements not be appropriate?
The financial statements fail to contain adequate disclosure of related-party transactions.
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?
The financial statements fail to disclose information that is required by generally accepted accounting principles.
Which of the following indicates the minimum required scope in an agreed-upon procedures engagement:
There is no minimum required scope in an agreed-upon procedures engagement.
Type 1 - what does the change entail if the client decides that the auditor can disclose the subsequent event?
adjust the financial statements to record the change
Type 1 subsequent events require the financial statements to be _______ if needed.
adjusted
Type 1 subsequent events require ______ of the financial statements.
adjustment
A(n) _____ opinion is appropriate if a material misstatement is considered pervasive.
adverse
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 misstatements have a material and pervasive effect on the financial statements?
adverse opinion
A material misstatement is considered pervasive
adverse opinion
The client has elected to not follow GAAP
adverse opinion
Type 2 subsequent events come into existence _____ the balance sheet date.
after
Examples of limited procedures in a review are ______ procedures and inquiries.
analytical
The procedures used in a review engagement are:
analytical procedures, inquiry, and obtaining a management representation letter.
Auditors may add an emphasis-of-matter paragraph that refers to a matter that is _________ presented or disclosed.
appropriately
A(n)_______provides the highest form of assurance CPAs can offer.
audit
In a(n)______, the risk of material misstatement is low.
audit
Type 1 subsequent events involve events that existed _____ the balance sheet date.
before
A preparation 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) Preparation of financial statements solely for submission to a taxing authority.
Which party should request a letter regarding litigation, claims, and assessments from the client's attorney?
client
Before the impact of adjusting entries proposed by auditors are included in the client's financial statements, the adjustments must be approved by the
client's management.
The primary source of information auditors use to obtain information about litigation, claims, and assessments is the
client's management.
SSARS Review: Analytical Procedure
compare recorded amounts to expectations developed compare recorded amounts to amounts from prior period
When accountants are not independent, which of the following reports can they issue:
compilation report on historical financial statements.
The accountant's standard report for a compilation engagement would not include a statement that:
compilation service consists primarily of inquiries of company personnel and analytical procedures applied to financial data.
Auditors who are reporting on financial statements that contain a material departure from generally accepted accounting principles should
express a qualified or adverse opinion.
When updating the report on prior years' financial statements presented in comparative form, the auditors' responsibility for the prior years' financial statements is
extended to the date of the updated audit report.
The CPA's opinion on the ______of the financial statements may be changed by subsequent events.
fairness
Prospective financial information that reflects the results assuming the occurrence of one or more hypothetical events is referred to as a:
financial projection
An emphasis-of-matter paragraph always _______ the opinion paragraph.
follows
Type 2 - what does the change entail if the client decides that the auditor can disclose the subsequent event?
footnote
What is the reason of this EOM paragraph? the accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, but there is substantial doubt about its ability to continue as a going concern
going concern opinion
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
involvement of component auditors in the audit of the group financial statements.
The review report provides ______ assurance that the information is fairly presented.
limited
Many subsequent events may involve the settling of ________.
litigation
An engagement letter needs to be signed by _________.
management
A departure from GAAP is included as a _____ paragraph to the report.
separate
The date of a review report _____ be earlier than the date on which sufficient evidence is received.
should not
Which of the following events or activities may occur following the audit report release date?
subsequently discovered facts
The conclusions provided in an accountants' report on an agreed-upon procedures engagement are in the form of a(n):
summary of findings
Small and Tall, CPAs, completed the December 31, 2020 audit of Big Company on February 10, 2021. After the audit report release date, an outstanding lawsuit against Big Company was settled for materially more than recorded in the December 31, 2020 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
take no action since the event took place after the audit report release date.
Compiled financial statements for a non-issuer should be accompanied by a report stating that:
the accountant does not express an opinion or any other form of assurance on the financial statements.
An accountants' report includes the phrase "We are not aware". This phrase indicates:
the accountants are providing limited assurance.
Long and Short, CPAs, were auditing Island Corporation for the year ended December 31, 2020. On January 11, 2021, 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, 2021. As a result, a material accounts receivable from the customer was determined to be uncollectible. Long and Short, CPAs, would expect the client to
treat the loss as a subsequent event and provide a footnote about the loss in the 2020 financial statements.
When providing limited assurance that the reviewed financial statements of a non-issuer require no material modifications to be in accordance with generally accepted accounting principles, the accountant should:
understand the accounting principles of the industry in which the entity operates.
An engagement letter documents the _______ of the terms of the engagement with the client.
understanding
Auditors have obtained sufficiently appropriate evidence to conclude that the financial statements are not materially misstated
unmodified opinion
