CPA Prep 11-15

The auditor is unable to reach a conclusion as to the propriety of management's representations due to management's inadequate record retention policies. The auditor will have to consider issuing a(n)

Answer: d. Qualified opinion or a disclaimer of opinion.

A CPA's standard report on a nonpublic company's audited financial statements would be inappropriate if it referred to

Answer: d. The CPA's assessment of sampling risk factors.

During the process of confirming receivables as of December 31, year 1, a positive confirmation was returned indicating the "balance owed as of December 31 was paid on January 9, year 2." The auditor would most likely

Answer: d. Verify that the amount was received.

If the auditor believes that required disclosures of a significant nature are omitted from the financial statements under examination, the auditor should decide between issuing

Answer: a. A qualified opinion or an adverse opinion.

An auditor's analytical procedures indicate a lower than expected return on an equity method investment. This situation most likely could have been caused by

Answer: a. An error in recording amortization of the excess of the investor's cost over the investment's underlying book value.

An auditor's working papers will generally be least likely to include documentation showing how the

Answer: a. Client's schedules were prepared.

Audit documentation of the audit of a nonpublic company should be retained

Answer: a. The longer of five years, or the legal requirements.

Under which of the following circumstances would the expression of a disclaimer of opinion be inappropriate?

Answer: b. Management does not provide reasonable justification for a change in accounting principles.

An auditor believes there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. In evaluating the entity's plans for dealing with the adverse effects of future conditions and events, the auditor most likely would consider, as a mitigating factor, the entity's plans to

Answer: b. Postpone expenditures to upgrade its information technology system.

An auditor's report included an additional paragraph disclosing that there is a difference of opinion between the auditor and the client for which the auditor believed an adjustment to the financial statements should be made. The auditor views the misstatement involved as material, but not so pervasively material as to make the overall financial statements misleading. The opinion paragraph of the auditor's report most likely expressed a(n)

Answer: b. Qualified opinion.

Which of the following will not result in modification of the auditor's report due to a scope limitation?

Answer: b. Reliance placed on the report of another auditor.

Which of the following statements is most accurate regarding sufficient and appropriate documentation?

Answer: b. Sufficient and appropriate documentation should include evidence that the audit working papers have been reviewed.

Which of the following conditions or events most likely would cause an auditor to have substantial doubt about an entity's ability to continue as a going concern?

Answer: b. Usual trade credit from suppliers is denied.

Which of the following is required documentation in an audit in accordance with generally accepted auditing standards?

Answer: c. A written audit program describing the necessary procedures to be performed.

Audit documentation should be prepared so as to enable an individual to understand the procedures performed, audit evidence obtained, and conclusions reached. The individual is

Answer: c. An experienced auditor with no previous connection to the audit.

When an auditor decides to confirm accounts receivable balances rather than individual invoices, it most likely would be beneficial to include with the confirmations

Answer: c. Client-prepared statements of account that show the details of the account balances.

An auditor most likely would apply analytical procedures near the completion of the audit to

Answer: c. Determine whether additional audit evidence may be needed.

Confirmation of individual accounts receivable balances directly with debtors will, of itself, normally provide evidence concerning the

Answer: c. Existence of the balances confirmed.

An auditor would be most likely to identify a contingent liability by obtaining a(n)

Answer: c. Lawyer's letter.

The blank form of accounts receivable confirmations may be less efficient than the positive form because

Answer: c. More nonresponses to the requests are likely to occur.

At the conclusion of an audit, an auditor is reviewing the evidence gathered in support of the financial statements. With regard to the valuation of inventory, the auditor concludes that the evidence obtained is not sufficient to support management's representations. Which of the following actions is the auditor most likely to take?

Answer: c. Obtain additional evidence regarding the valuation of inventory.

Analytical procedures are most appropriate when testing which of the following types of transactions?

Answer: c. Operating expense transactions.

An auditor's decision whether to apply analytical procedures as substantive tests usually is determined by the

Answer: c. Precision and reliability of the data used to develop expectations.

An auditor would be least likely to use confirmations in connection with the examination of

Answer: c. Property, plant, and equipment.

In auditing contingent liabilities, which of the following procedures would an auditor most likely perform?

Answer: c. Read the minutes of the board of directors' meetings.

Which of the following tends to be most predictable for purposes of analytical procedures applied as substantive procedures?

Answer: c. Relationships involving income statement accounts.

When an auditor concludes there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time, the auditor's responsibility is to

Answer: d. Consider the adequacy of disclosure about the entity's possible inability to continue as a going concern.

As a result of analytical procedures, the independent auditor determines that the gross profit percentage has declined from 30% in the preceding year to 20% in the current year. The auditor should

Answer: d. Consider the possibility of a misstatement in the financial statements.

An auditor will be least likely to use a negative accounts receivable confirmation form when

Answer: d. Customers are unlikely to confirm the information.

An auditor concludes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. If the entity's disclosures concerning this matter are adequate, the audit report may include a(n):

Answer: d. No, No

An auditor's analytical procedures performed near the end of the audit indicated that the client's accounts receivable had doubled since the end of the prior year. However, the allowance for doubtful accounts as a percentage of accounts receivable remained about the same. Which of the following client explanations most likely would satisfy the auditor?

Answer: d. The client opened a second retail outlet in the current year and its credit sales approximately equaled the older, established outlet.

An auditor would issue an adverse opinion if

Answer: d. The statements taken as a whole do not fairly present the financial condition and results of operations of the company.

Auditor confirmation of accounts payable balances at the balance sheet date may be unnecessary because

Answer: d. There is likely to be other reliable external evidence to support the balances.

When an auditor conducts an audit in accordance with generally accepted auditing standards and concludes that the financial statements are fairly presented in accordance with a basis of accounting such as the cash basis of accounting, the auditor should issue a(n)

Answer: d. Unmodified opinion with an emphasis-of-matter paragraph.

After performing all necessary procedures a predecessor auditor reissues a prior-period report on financial statements at the request of the client without revising the original wording. The predecessor auditor should

Answer: d. Use the date of the previous report.

The negative request form of accounts receivable confirmation is useful particularly when the assessed level of the risk of material misstatement relating to receivables is ______ and the number of small balances is ______.

a. Low, Many

Which of the following factors would most likely influence an auditor's consideration of the reliability of data when performing analytical procedures?

c. Whether the data were developed under a system with adequate controls.

When the financial statements contain a departure from generally accepted accounting principles, the effect of which is material, the auditor should

Answer: a. Qualify the opinion and explain the effect of the departure from generally accepted accounting principles in a separate paragraph.

Jones, CPA, is the group engagement partner who is auditing the consolidated financial statements of his client. Jones plans to refer to a component auditor's examination of the financial statements of a subsidiary company but does not wish to present the other CPA's audit report. Both Jones and the other CPA's audit reports have noted no exceptions to generally accepted accounting principles. Under these circumstances the opinion paragraph of Jones' consolidated audit report should express

Answer: a. An unmodified opinion.

"In connection with an audit of our financial statements, management has prepared, and furnished to our auditors a description and evaluation of certain contingencies." The forgoing passage most likely is from a(n)

Answer: a. Audit inquiry letter to legal counsel.

Which of the following analytical procedures most likely would be used during the risk assessment stage of an audit?

Answer: a. Comparing current year to prior year sales volumes.

An auditor finds several errors in the financial statements that the client prefers not to correct. The auditor determines that the errors are not material in the aggregate. Which of the following actions by the auditor is most appropriate?

Answer: a. Document the errors in the summary of uncorrected errors, and document the conclusion that the errors do not cause the financial statements to be misstated.

An auditor has previously expressed a qualified opinion on the financial statements of a prior period because of a departure from generally accepted accounting principles. The prior-period financial statements are restated in the current period to conform with generally accepted accounting principles. The auditor's updated report on the prior-period financial statements should

Answer: a. Express an unmodified opinion concerning the restated financial statements.

Under the requirements of the PCAOB, audit documentation should be retained

Answer: a. For at least seven years.

Auditors try to identify predictable relationships when applying analytical procedures. Relationships involving transactions from which of the following accounts most likely would yield the highest level of evidence?

Answer: a. Interest expense.

Which of the following audit procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern?

Answer: a. Reading the minutes of meetings of the stockholders and the board of directors.

The auditor concludes that there is a material inconsistency in the other information in an annual report to shareholders containing audited financial statements. If the client refuses to revise or eliminate the material inconsistency, the auditor should

Answer: a. Revise the auditor's report to include a separate other-matter paragraph describing the material inconsistency.

A CPA has received an attorney's letter in which no significant disagreements with the client's assessments of contingent liabilities were noted. The resignation of the client's lawyer shortly after receipt of the letter should alert the auditor that

Answer: a. Undisclosed unasserted claims may have arisen.

Which of the following factors would least influence an auditor's consideration of the reliability of data for purposes of analytical procedures?

Answer: a. Whether the data were processed in a computerized system or in a manual accounting system.

Auditors may use positive and/or negative forms of confirmation requests for accounts receivable. An auditor most likely will use

Answer: b. A combination of the two forms, with the positive form used for large balances and the negative form for the small balances.

Which of the following procedures would an auditor most likely perform in obtaining evidence about subsequent events?

Answer: b. Compare the latest available interim financial information with the financial statements being reported upon.

Analytical procedures performed near the end of an audit generally would include

Answer: b. Considering the adequacy of the evidence gathered in response to unexpected balances identified in planning.

Restrictions imposed by a client prohibit the observation of physical inventories, which account for an extremely significant portion of total assets (65%). Alternative audit procedures cannot be applied, although the auditor was able to examine satisfactory evidence for all other items in the financial statements. The auditor should issue a(n)

Answer: b. Disclaimer of opinion.

When applying analytical procedures during an audit, which of the following is the best approach for developing and evaluating expectations?

Answer: b. Identifying reasonable explanations for unexpected differences before talking to client management.

With respect to issuance of an audit report which is dual dated for a subsequent event occurring after the completion of fieldwork but before issuance of the auditor's report, the auditor's responsibility for events occurring subsequent to the completion of fieldwork is

Answer: b. Limited to the specific event referred to.

"Subsequent events" for reporting purposes are defined as events which occur subsequent to the

Answer: c. Balance sheet date but prior to the date of the auditor's report.

After issuing an auditor's report, an auditor has no obligation to make continuing inquiries concerning audited financial statements unless

Answer: c. Information that existed at the report date and may affect the report comes to the auditor's attention.

Analytical procedures performed during an audit indicate that accounts receivable doubled since the end of the prior year. However, the allowance for doubtful accounts as a percentage of accounts receivable remained about the same. Which of the following client explanations would satisfy the auditor?

Answer: c. The client opened a second retail outlet during the current year and its credit sales approximately equaled the older outlet.

As one of the year-end audit procedures, the auditor instructed the client's personnel to prepare a standard bank confirmation request for a bank account that had been closed during the year. After the client's treasurer had signed the request, it was mailed by the assistant treasurer. What is the major flaw in this audit procedure?

Answer: c. The request was mailed by the assistant treasurer.

During the confirmation of accounts receivable, an auditor receives a confirmation via the client's fax machine. Which of the following actions should an auditor take?

Answer: d. Accept the confirmation but verify the source and content through a telephone call to the respondent.

Which of the following statements concerning analytical procedures is correct?

Answer: d. Analytical procedures alone may provide the appropriate level of assurance for some assertions.

Analytical procedures used in risk assessment for an audit should focus on identifying

Answer: d. Areas that may represent specific risks relevant to the audit.

On February 9, Brown, CPA, expressed an unmodified (unqualified) opinion on the financial statements of Web Co. On October 9, during a peer review of Brown's practice, the reviewer informed Brown that engagement personnel failed to perform a search for subsequent events for the Web engagement. Brown should first

Answer: d. Assess the importance of the omitted procedures to Brown's present ability to support the opinion.

A primary objective of analytical procedures used near completion of an audit is to

Answer: d. Assist the auditor in forming overall conclusions about whether the financial statements are consistent with the auditor's understanding of the company.

Which of the following analytical procedures should be applied to the income statement?

Answer: d. Compare the actual revenues and expenses with the corresponding figures of the previous year and investigate significant differences.

Which of the following representations does an auditor make explicitly and which implicitly when issuing an unmodified opinion?

Answer: d. Conformity with GAAP (explicitly), Adequacy of disclosure (implicitly)

Comparative financial statements include the financial statements of a prior period which were examined by a predecessor auditor, whose report is not presented. If the predecessor auditor's report was qualified, the successor auditor must

Answer: d. Disclose the reasons for any qualification included in the predecessor auditor's opinion.

Which of the following procedures would an auditor most likely perform to obtain evidence about an entity's subsequent events?

Answer: d. Obtain a letter from the entity's attorney describing any pending litigation, unasserted claims, or loss contingencies.