Exam 1 Pt. 2
4) An auditor determines the financial statements include at least a material departure from GAAP. Which type of opinion may be issued?-Disclaimer-Qualified-Adverse
-Qualified-Adverse
24. To express an opinion on internal controls, and auditor obtains an understanding of and performs tests of controls related to all but which of the following? A. Account balances B. Significant account balances C. Classes of transactions D. Disclosures and related assertions in the financial
A
54. Evidential matter concerning proper segregation of duties ordinarily is best obtained by A. Direct personal observation of the employee who applies control procedures B.Making inquiries of co-workers about the employee who applies control procedures C. Preparation of a flowchart of duties performed and available personnel D. Inspection of third-party documents containing the initials of who applied control procedures
A
64. To comply with the second standard of fieldwork, the auditor need not be concerned with all five areas of internal control that apply to management. The auditor's primary concerns are with the internal control's ability to A. Ensure reliability of financial reporting for external purposes B. Provide reliable data and promote efficiency C. Promote efficiency and encourage adherence to policy D. Provide reliable data, safeguard assets, and comply with the Sarbanes-Oxley Act of 2002.
A
66. The primary emphasis by auditors is on controls over A. Classes of transactions B. Account balances C. Both A and B, because they are equally important D. Both A and B, because they are vary from client to client.
A
73.When a compensating control exists, the absence of a key control A. Is no longer a concern because there is no longer a significant deficiency or material weakness B. Is a slight concern to the auditor C. Could cause a material loss, so it must be tested using substantive procedures D. Is magnified and must be removed from the sampling
A
1) As a result of management's refusal to permit the auditor to physically examine inventory, the auditor must depart from the unmodified opinion audit report becauseA) the financial statements have not been prepared in accordance with GAAP.B) the scope of the audit has been restricted by circumstances beyond either the client's or auditor's control.C) the financial statements have not been audited in accordance with GAAS.D) the scope of the audit has been restricted.
Answer: D
43. A procedure that would most likely be used by an auditor in performing tests of control procedures that involve segregation of functions and that leave no transaction trail is A. Inspection B. Observation C. Reperformance D. Reconciliation
B
53. Effective internal control in a small company that has an insufficient number of employees to permit proper division of responsibilities can best be enhanced by A. Employment of temporary personnel to aid in the separation of duties B. Direct participation by the owner of the business in the record-keeping activities of the business C. Engaging a CPA to perform monthly "write-up" work D. Delegation of full, clear-cut responsibility to each employee for the functions assigned to each.
B
55. Proper segregation of functional responsibilities calls for separation of the functions of A. Authorization, execution, and payment B. Authorization, recording and custody C. Custody, execution, and reporting D. Authorization, payment and recording
B
51.Which of the following is not one of the subcomponents of the control environment? A.Management's philosophy and operating style. B. Organizational structure C. Adequate separation of duties D. Commitment to competence
C
67. The most important difference in a nonpublic company in assessing control risk is the ability to assess control risk at ____________ for any or all control-related objectives. A. Low B.Medium C. High D.None of the above
C
69. An auditor should consider two key issues when obtaining an understanding of a client's internal controls. These issues are A. The effectiveness and efficiency of the controls B. The frequency and effectiveness of the controls C. The design and utilization of the controls D.None of the above
C
72.When planning an audit, the auditor's assessed level of control risk is A. Determined by using actuarial tables B. Calculated by using the audit risk model C. An economic issue, trading off the costs of testing controls against the cost of testing balances D. Calculated by using the formulas provided in the AICPA's auditing standards
C
Indicate which changes would require an explanatory paragraph in the audit report.A)Change in the estimated lifeof an assetVariation in the format of thefinancial statementsYes YesB)Change in the estimated lifeof an assetVariation in the format of thefinancial statementsNo NoC)Change in the estimated lifeof an assetVariation in the format of thefinancial statementsYes NoD)Change in the estimated lifeof an assetVariation in the format of thefinancial statementsNo Yes
Change in the estimated lifeof an assetVariation in the format of thefinancial statementsNo No
Indicate which changes would require an explanatory paragraph in the audit report.A)Changes in reporting entities,such as the inclusion of anadditional company in thecombined financialstatements (YES)The CPA makes reference tothe work of another auditorto indicate sharedresponsibility in anunqualified opinion. (YES)Yes YesB)Changes in reporting entities,such as the inclusion of anadditional company in thecombined financialstatements(NO)The CPA makes reference tothe work of another auditorto indicate sharedresponsibility in anunqualified opinion.(NO)No NoC)Changes in reporting entities,such as the inclusion of anadditional company in thecombined financialstatements (YES)The CPA makes reference tothe work of another auditorto indicate sharedresponsibility in anunqualified opinion. (NO)Yes NoD)Changes in reporting entities,such as the inclusion of anadditional company in thecombined financialstatements (NO)The CPA makes reference tothe work of another auditorto indicate sharedresponsibility in anunqualified opinion. (YES)No Yes Changes in reporting entities,such as the inclusion of anadditional company in thecombined financialstatements (YES)The CPA makes reference tothe work of another auditorto indicate sharedresponsibility in anunqualified opinion. (NO)Yes No
Changes in reporting entities,such as the inclusion of anadditional company in thecombined financialstatements (YES)The CPA makes reference tothe work of another auditorto indicate sharedresponsibility in anunqualified opinion. (NO)Yes No
Indicate which changes would require an explanatory paragraph in the audit report.A)Correction of an error by changing froman accounting principle that is notgenerally acceptable to one that isgenerally acceptable (YES)Change from LIFO to FIFO (YES)Yes YesB)Correction of an error by changing froman accounting principle that is notgenerally acceptable to one that isgenerally acceptable (NO)Change from LIFO to FIFO (NO)No NoC)Correction of an error by changing froman accounting principle that is notgenerally acceptable to one that isgenerally acceptable (YES)Change from LIFO to FIFO (NO)Yes NoD)Correction of an error by changing froman accounting principle that is notgenerally acceptable to one that isgenerally acceptable (NO)Change from LIFO to FIFO (YES)No Yes
Correction of an error by changing froman accounting principle that is notgenerally acceptable to one that isgenerally acceptable (YES)Change from LIFO to FIFO (YES)Yes Yes
49.Of the following statements about internal controls, which one is not valid? A. No one person should be responsible for the custodial responsibility and the recording responsibility for an asset. B. Transactions must be properly authorized before such transactions are processed. C. Because of the cost benefit relationship, a client may apply control procedures on a test basis. D. Control procedures reasonably ensure that collusion among employees cannot occur
D
56.When considering the objectivity of internal auditors, an independent auditor should A. Evaluate the quality control program in effect for the internal auditors B. Examine documentary evidence of the work performed by the internal auditors C. Test a sample of the transactions and balances that the internal auditors examined D. Determine the organizational level to which the internal auditors report
D
63.When considering internal control, an auditor should be aware of the concept of reasonable assurance, which recognizes that the A. Segregation of incompatible functions is necessary to ascertain that internal control is effective B. Employment of competent personnel provides assurance that the objectives of internal control will be achieved C. Establishment and maintenance of internal control is an important responsibility of the management and not of the auditor D. Costs of internal control should not exceed the benefits expected to be derived from internal control.
D
71. Taylor Sales Corp. maintains a large full-time internal audit staff that reports directly to the chief accountant. Audit reports prepared by the internal auditors indicate that the system is functioning as it should and that the accounting records are reliable. The independent auditor will probably A. Eliminate tests of controls B. Increase the depth of the study and evaluation of administrative controls C. Avoid duplicating the work performed by the internal audit staff D. Place limited reliance on the work performed by the internal audit staff.
D
Indicate which changes would require an explanatory paragraph in the audit report.A)The CPA concludes there issubstantial doubt about theentity's ability to continue asa going concern. (YES)Change from FIFO to LIFO (YES)Yes YesB)The CPA concludes there issubstantial doubt about theentity's ability to continue asa going concern. (NO)Change from FIFO to LIFO (NO)No NoC)The CPA concludes there issubstantial doubt about theentity's ability to continue asa going concern. (YES)Change from FIFO to LIFO (NO)Yes NoD)The CPA concludes there issubstantial doubt about theentity's ability to continue asa going concern. (NO)Change from FIFO to LIFO (YES)No Yes
The CPA concludes there issubstantial doubt about theentity's ability to continue asa going concern. (YES)Change from FIFO to LIFO (YES)Yes
16) The most common case in which conditions beyond the client's and auditor's control cause a scope restriction in an engagement is when the: A) auditor is not appointed until after the client's year-end. B) client won't allow the auditor to confirm receivables for fear of offending its customers. C) auditor doesn't have enough staff to satisfactorily audit all of the client's foreign subsidiaries. D) client is going through Chapter 11 bankruptcy.
a
2) Auditing standards require that the audit report must be titled and that the title must: A) include the word "independent." B) indicate if the auditor is a CPA. C) indicate if the auditor is a proprietorship, partnership, or corporation. D) indicate the type of audit opinion issued.
a
34. All of the following are substantive tests except A. Tests of controls B. Test of details of transactions C. Tests of details of balances D. Analytical procedures
a
41.Which of the following is the correct definition of "control deficiency" A. A control deficiency exists if the design or operation of controls does not permit company personnel to prevent or detect misstatements on a timely basis B. A control deficiency exists if one or more deficiencies exist that adversely affect a company's ability to prepare external financial statements reliably C. A control deficiency exists if the design or operation of controls results in a more than remote likelihood that controls will not prevent or detect misstatements. D.None of the above is a correct definition.
a
75.When obtaining an understanding of an entity's control environment, an auditor should concentrate on the substance of management's policies and procedures rather than their form because A.Management may establish appropriate policies and procedures but not act on them. B. The board of directors may not be aware of management's attitude toward the control environment C. The auditor may believe that the policies and procedures are inappropriate for that particular entity. D. The policies and procedures may be so weak that no reliance is contemplated by the auditor
a
When comparing misstatements with a measurement base, the auditor must consider the pervasiveness of the misstatement. Of the following examples, the most pervasive misstatement is a(n):A) understatement of inventory.B) understatement of retained earnings caused by a miscalculation of dividends payable.C) misclassification of notes payable as a long-term liability when it should be current.D) misclassification of salary expense as a selling expense.
a
11) Subsequent to the close of Spacely Sprockets fiscal year ending October 31, 2012, a major debtor has declared bankruptcy due to a series of events. The receivable is significantly material in relation to the financial statements, and recovery is doubtful. The debtor had confirmed the full amount due to Spacely Sprocket at the balance sheet date. Because the account was confirmed at the balance sheet date, Spacely refuses to disclose any information in relation to this subsequent event. The CPA believes that all other accounts were stated fairly at the balance sheet date. In addition, Spacely changed their method of inventory valuation from FIFO to LIFO. This change was disclosed in Note X to the financial statements. Accordingly, what type of opinion should be expressed? A) Unqualified with an explanatory paragraph. B) Qualified due to a GAAP departure. C) Qualified due to a scope limitation. D) A combination of B and C.
b
13) When an adverse opinion is issued, a scope paragraph would be: A) qualified. B) unchanged. C) deleted. D) expanded to identify the additional procedures which the auditor performed. 14)
b
14) In which of the following circumstances would an auditor most likely express an adverse opinion? A) The CEO refuses to let the auditor have access to the board of director meeting minutes. B) The financial statements are not in conformity with the FASB statement on loss contingencies. C) Information comes to the auditor's attention that raises substantial doubt about the ability for the client to continue as a going concern. D) Tests of controls show that the internal control structure is so poor that the auditor has to assess control risk at the maximum.
b
30. Authorizations can be either general or specific. Which of the following is not an example of a general authorization? A. Automatic reorder points for raw materials inventory B. A sales manager's authorization for a sales return. C. Credit limits for various classes of customers D. A sales price list for merchandise
b
35.Most audits of a company are done annually by the same CPA firm. Except for initial engagements, the auditor begins the audit with a great deal of information about the internal controls developed in prior years. Because systems and controls usually do not change often A. The auditor can skip the evaluation of this area on repeat engagements. B. This information can be updated and carried forward to the current year's audit. C. It eases the burden on the auditor's requirement to do a complete study of the controls this year. D. It is sufficient for the auditor just to inquire of client whether the controls have been changed since last year.
b
4) The dollar amount of some misstatements cannot be accurately measured. For example, if the client were unwilling to disclose an existing lawsuit, the auditor must estimate the likely effect on: A) net income. B) users of the financial statements. C) the auditor's exposure to lawsuits. D) management's future decisions.
b
5) A qualified opinion can be issued for which of the following?I. When a limitation on the scope of the audit has occurredII. When the auditor lacks independenceIII. When generally accepted accounting principles have not been usedA) I and IIB) I and IIIC) II and IIID) I, II and III
b
6) If the financial statements include an income statement and a balance sheet but exclude the statement of cash flows, the auditors: A) can issue an unqualified report. B) should issue a qualified opinion due to the departure from GAAP. C) should issue a qualified opinion because the missing statement of cash flows constitutes a scope limitation. D) should include the statement of cash flows, modify the report and issue an unqualified opinion.
b
7) When the auditor determines that the financial statements are fairly stated, but there is a nonindependent relationship between the auditor and the client, the auditor should issueA) an adverse opinion.B) a disclaimer of opinion.C) either a qualified opinion or an adverse opinion.D) either a qualified opinion or an unqualified opinion with modified wording.
b
7) Which of the following is not explicitly stated in the standard unqualified audit report? A) The financial statements are the responsibility of management. B) The audit was conducted in accordance with generally accepted accounting principles. C) The auditors believe that the audit evidence provides a reasonable basis for their opinion. D) An audit includes assessing the accounting estimates used
b
All of the following are causes for the addition of an explanatory paragraph under bothAICPA and PCAOB standards except forA) emphasis of a matter.B) reports involving other auditors.C) lack of consistent application of generally accepted accounting principles.D) auditor agrees with a departure from promulgated accounting principles
b
All of the following would require an emphasis of matter paragraph except forA) the existence of material related party transactions.B) the lack of auditor independence.C) important events occurring subsequent to the balance sheet date.D) material uncertainties disclosed in the footnotes.
b
The explanatory paragraph for a qualified opinion would:A) precede the scope paragraph.B) follow the scope paragraph.C) follow the opinion paragraph.D) either precede or follow the opinion paragraph depending on the materiality
b
When there is uncertainty about a company's ability to continue as a going concern, the auditor's concern is the possibility that the client may not be able to continue its operations or meet its obligations for a "reasonable period of time." For this purpose, a reasonable period of time is considered not to exceedA) six months from the date of the financial statements.B) one year from the date of the financial statements.C) six months from the date of the audit report.D) one year from the date of the audit repor
b
Which of the following is a correct statement regarding materiality?A) There are well-defined guidelines that enable auditors to determine if something is material.B) Misstatements must be compared with some benchmark before a decision can be made about the materiality level of the failure of a company to follow GAAP.C) Pervasiveness is not considered when comparing potential misstatements with a base or benchmark.D) To evaluate overall materiality, the auditor does not combine all unadjusted misstatements
b
Which of the following statements are true for the standard unmodified opinion audit report of a nonpublic entity?I. The introductory paragraph states that management is responsible for the preparation and content of the financial statements.II. The scope paragraph states that the auditor evaluates the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management.A) I onlyB) II onlyC) I and IID) Neither I nor II
b
1) An audit of historical financial statements most commonly includes the: A) balance sheet, statement of retained earnings, and the statement of cash flows. B) income statement, the statement of cash flows, and the statement of net working capital. C) statement of cash flows, balance sheet, and the statement of retained earnings. D) balance sheet, income statement, statement of cash flows, and the statement of changes in stockholders' equity.
c
11) Items that materially affect the comparability of financial statements generally require disclosure in the footnotes. If the client refuses to properly disclose the item, the auditor will most likely issue: A) a disclaimer. B) an unqualified opinion. C) a qualified opinion. D) an adverse opinion.
c
12) For the report containing a disclaimer for lack of independence, the disclaimer is in the: A) second or scope paragraph. B) third or opinion paragraph. C) first and only paragraph. D) fourth or explanatory paragraph.
c
12) Which of the following scenarios does not result in a qualified opinion? A) A scope limitation prevents the auditor from completing an important audit procedure. B) Circumstances exist that prevent the auditor from conducting a complete audit. C) The auditor lacks independence with respect to the audited entity. D) An accounting principle at variance with GAAP is used.
c
14) After the balance sheet date but prior to issuance of the auditor's report the auditor learns that the client's facility in a foreign country has been expropriated. Management refuses to disclose this information in a financial statement footnote or present pro-forma data as to the effect of the event. The auditor should: A) add a footnote to the financial statements. B) disclaim an opinion due to the client imposed scope limitation. C) provide the information in the report and modify the opinion. D) issue an unqualified opinion but provide the information in the auditor report.
c
31. The most important type of protective measure for safeguarding assets and records is A. Adequate separation of duties among personnel B. Proper authorization of transactions C. The use of physical precautions D. Adequate documentation
c
38.Which of the following statements about the internal control questionnaire is not correct? A. A questionnaire can lead to a piecemeal view of a client's control without providing an overall view B. The questionnaire can be prepared reasonably quickly C. A questionnaire is usually applicable to a wide variety of companies, especially smaller ones D. Each of the above statements is correct.
c
39. Specific assessments must be made to arrive at the preliminary assessment of control risk. Which of the following is not one of these assessments? A. Is the entity auditable? B.What is the expectation that internal controls will neither prevent material misstatements from occurring nor detect and correct them if they have occurred? C. Is management committed to internal control? D. Each of the above is required assessment
c
7) Which of the following is incorrect concerning scope limitations? A) If client imposed, the auditor should be concerned about the client trying to prevent discovery of a material misstatement. B) An unqualified opinion can result if auditors can perform alternative procedures and are satisfied that the information is fairly stated. C) The most common circumstance imposed scope restriction is due to the client changing their auditors. D) The most common circumstance imposed scope limitation is when the auditor is appointed after the balance sheet date.
c
The appropriate audit report date for a standard unmodified opinion audit report for a nonpublic entity should beA) the date the financial statements are given to the Board of Directors.B) the date of the financial statements.C) the date the auditor completed the auditing procedures in the field.D) 60 days after the date of the financial statements as required by the SEC.
c
The independent auditor must issue a qualified opinion when which of the financial(s) are missing?I. Balance SheetII. Income StatementIII. Statement of Cash FlowsA) I onlyB) II onlyC) III onlyD) I, II, and III
c
The unqualified opinion audit report for public entities includes the following three paragraphs:A) introductory, scope and management's responsibility.B) materiality, scope and report.C) introductory, scope and opinion.D) scope, fieldwork and conclusion.
c
Under AICPA auditing standards, the primary auditor issuing the opinion on the financial statements is called theA) component auditor.B) principal auditor.C) group engagement partner.D) majority auditor
c
When an auditor is trying to determine how changes can affect consistency and and/or comparability, he should keep in mind thatA) changes that affect comparability but not consistency require an explanatory paragraph.B) items that materially affect the comparability of financial statements requires a disclaimer ofopinion.C) changes that affect consistency require an explanatory paragraph if they are material.D) changes that involve either comparability or consistency only need to be mentioned in thefootnotes.
c
When the auditor concludes that there is substantial doubt about the entity's ability to continue as a going concern, the appropriate audit report could beI. an unmodified opinion audit report with an explanatory paragraph.II. a disclaimer of opinion.A) I onlyB) II onlyC) I or IID) Neither I nor II
c
Which of the following requires recognition in the auditor's opinion as to consistency?A) The correction of an error in the prior year's financial statements resulting from a mathematical mistake in capitalizing interest.B) A change in the estimate of provisions for warranty costs.C) The change from the cost method to the equity method of accounting for investments in common stock.D) A change in depreciation method which has no effect on current year's financial statements but is certain to affect future years.
c
William Gregory, CPA, is the principal auditor for an international corporation. Another CPA has examined and reported on the financial statements of a significant subsidiary of the corporation. Gregory is satisfied with the independence and professional reputation of the otherauditor, as well as the quality of the other auditor's examination. With respect to his report on the consolidated financial statements, taken as a whole, GregoryA) must not refer to the examination of the other auditor.B) must refer to the examination of the other auditor.C) may refer to the examination of the other auditor.D) must refer to the examination of the other auditors along with the percentage of consolidatedassets and revenue that they audited.
c
10) A client has changed their method of valuing inventory from FIFO to LIFO and the change has a material effect on the financial statements. If the auditor does not concur with the appropriateness of the change, the auditor should issue a(n): A) disclaimer. B) adverse opinion. C) unqualified opinion. D) qualified opinion.
d
17) When the client fails to make adequate disclosure in the body of the statements or in the related footnotes, it is the responsibility of the auditor to: A) inform the reader that disclosure is not adequate, and to issue an adverse opinion. B) inform the reader that disclosure is not adequate, and to issue a qualified opinion. C) present the information in the audit report and issue an unqualified or qualified opinion. D) present the information in the audit report and to issue a qualified or an adverse opinion
d
33. The SEC prohibits US stock exchanges from listing securities if a company's audit committee is A. Not comprised of solely independent directors B. Inadequately funded C. Not solely responsible for hiring and firing the company's auditors D. All of the above are correct
d
37.Which of the following is not an element of a proper narrative of an accounting system and related controls? A. The origin of every document and record in the system should be stated B. All processing that takes place should be described C. The disposition of every document and record in the system should be stated D. There should be an indication of all controls affecting the applicable process
d
5) Which of the following statements is true? I. The auditor is required to issue a disclaimer of opinion in the event of a material uncertainty. II. The auditor is required to issue a disclaimer of opinion in the event of a going concern problem. A) I only B) II only C) I and II D) Neither I nor II
d
6) In which situation would the auditor be choosing between "except for" qualified opinion and an adverse opinion?A) The auditor lacks independence.B) A client-imposed scope limitationC) A circumstance-imposed scope limitationD) Lack of full disclosure within the footnotes
d
8) When dealing with materiality and scope limitation conditions: A) a disclaimer of opinion must be issued. B) it is easier to evaluate the materiality of potential misstatements resulting from a scope limitation than for failure to follow GAAP. C) scope limitations imposed by the client are always considered material. D) a unqualified opinion may still be issued depending on the materiality of the scope limitation.
d
A company has changed its method of inventory valuation from an unacceptable one to one in conformity with generally accepted accounting principles. The auditor's report on the financialstatements of the year of the change should includeA) no reference to consistency.B) a reference to a prior period adjustment in the opinion paragraph.C) an explanatory paragraph that justifies the change and explains the impact of the change onreported net income.D) an explanatory paragraph explaining the change.
d
An auditor can express a qualified opinion due to a:A.Departure from GAAP - YesLack of Consistency - YesLack of Sufficient Evidence - YesB.Departure from GAAP - YesLack of Consistency - NoLack of Sufficient Evidence - NoC.Departure from GAAP - NoLack of Consistency - YesLack of Sufficient Evidence - NoD.Departure from GAAP - YesLack of Consistency - NoLack of Sufficient Evidence - Yes
d
Misstatements must be compared with some measurement base before a decision can be made about materiality. A commonly accepted measurement base includes:A) net income.B) total assets.C) working capital.D) all of the above.
d
No reference is made in the auditor's report to other auditors who perform a portion of the audit whenI. The other auditor audited an immaterial portion of the audit.II. The other auditor is well known or closely supervised by the principle auditor.III. The principle auditor has thoroughly reviewed the work of the other auditor.A) I and IIB) I and IIIC) II and IIID) I, II and III
d
What category of audit report will be issued if the auditor concludes that the financialstatements are not fairly presented?A) disclaimerB) qualifiedC) standard unmodified opinionD) adverse
d
When an auditor issues a qualified report due to a scope limitation an explanatory paragraph is normally added. Which, if any, of the following paragraphs are also modified?A)Introductory YScope YOpinion YB)Introductory YScope YOpinion NC)Introductory NScope YOpinion ND)Introductory NScope YOpinion Y
d
Which of the following modifications of the auditor's report does not include an explanatory paragraph?A) A qualified report is due to a GAAP departure.B) The report includes an emphasis of a matter.C) There is a very material scope limitation.D) A principal auditor accepts the work of an other auditor.
d
