1. Audit Reports

Question 1

When assessing management’s plans for dealing with the adverse effects of future conditions and events, mitigating factors would include:

Answer 1

1. The postponement of expenditures (including Research & Development)
2. Plans to dispose of assets,
3. Plans to borrow money or restructure debt,
4. Plans to increase ownership equity (sell stock).

Question 2

The auditor’s considerations relating to management’s plans for dealing with the adverse effects of these conditions most likely would include management’s plans to:

Answer 2

Typically, plans to increase ownership equity, to borrow money, to restructure debt, to sell assets, and/or to reduce or delay expenditures might all be considered mitigating factors.

Question 3

What is a Disclaimer of Opinion?

Answer 3

A disclaimer of opinion means that the auditor was unable to obtain sufficient appropriate audit evidence to provide a reasonable basis for an opinion, thus, no opinion is expressed.

GAAS (insufficient audit evidence)= Very Material Issue

GAAS

Question 4

What is Emphasis-of-Matter?

Answer 4

1. Emphasis-of-Matter and Other Matter Paragraphs
   In certain circumstances, the auditor may determine that it is necessary to add additional communications to the auditor’s report WITHOUT MODIFYING THE AUDITOR’S OPINION.

U.S. auditing standards do not require an emphasis-of-matter paragraph when an uncertainty is
properly disclosed.

Question 5

What is a Qualified Opinion?

Answer 5

A qualified opinion states that except for the effects of the matter(s) to which the qualification relates, the financial statements present fairly, In all material respects, the financial postilion, results of operations, and cash flows of the entity in conformity with the applicable financial reporting framework.
GAAP or GAAS = Material Issue

Question 6

What is an Adverse Opinion?

Answer 6

An adverse opinion states that the financial statements do not present fairly the financial position, results of operations, or cash flows of the entity In conformity with the applicable financial reporting framework.
GAAP (Materially Misstated)= Very Material Issue

Question 7

What is a scope limitation?

Answer 7

Occurs when the auditor is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements as a whole are free from material misstatement.

Question 8

An auditor may reasonably issue an "except for" qualified opinion for a(an):
Scope limitation
Unjustified accounting change
a. No       No
b. Yes      Yes
c. No       Yes
d. Yes      No

Answer 8

Choice “b” is correct. Yes - Yes.
An “except for” qualified opinion is expressed when the “exceptions to GAAP” or scope restrictions are material but not pervasive.
Choices “d”, “c”, and “a” are incorrect, based on the rule above.

Question 9

Pell, CPA, decides to serve as group engagement partner in the audit of the financial statements of Tech Consolidated, Inc. Smith, CPA, auditsone of Tech’s subsidiaries. In which situation(s) should Pell make reference to Smith’s audit under U.S. GAAS?
I. Pell reviews Smith’s audit documentation and assumes
responsibility for Smith’s work, but expresses a qualified opinion on Tech’s financial statements.
II. Pell is unable to review Smith’s audit documentation; however, Pell’s inquiries indicate that Smith has an excellent reputation for professional competence and integrity.

Answer 9

II only. Under U.S. GAAS, the group engagement partner
makes reference in the audit report to the work of the component auditor when the group engagement partner is unable to review the component auditor’s audit documentation. This is because the group engagement partner will be unable to be satisfied concerning the work performed by the component auditor. Even though the component auditor has an excellent reputation, the group engagement partner must see the work to be able to assume responsibility for it. Note that under ISAs, no reference is made to the component auditor unless required by law or regulation.
Choice “b” is incorrect. When the group engagement partner decides to assume responsibility for the work of the component auditor, no reference is made to the work of the component auditor.

Question 10

In the first audit of a new client, an auditor was able to extend auditing procedures to gather sufficient evidence about consistency. Under these circumstances, the auditor should:

a. State that the consistency standard does not apply.
b. Not refer to consistency in the auditor’s report.
c. Not report on the client’s income statement.
d. State that the accounting principles have been applied consistently.

Answer 10

Choice “b” is correct. The auditor’s standard report implies that the auditor is satisfied that the comparability of financial statements between periods has not been materially affected by changes in accounting principles and that such principles have been consistently applied between or among periods. Since the auditor has gathered sufficient evidence about consistency, no reference need be made in the report.

Question 11

Types of Opinions:

The auditor wishes to emphasize an unusually important subsequent event.

Answer 11

Emphasis of a matter is disclosed in an additional paragraph added to an otherwise unmodified opinion.

Question 12

Types of Opinions:

Quarterly financial data required by the SEC has been omitted.

Answer 12

Omission of selected quarterly data required by SEC regulations is disclosed in an emphasis-of-matter paragraph added to an otherwise unmodified opinion.

Question 13

Reference in a group engagement partner’s report to the fact that part of the audit was performed by another auditor most likely would be an indication of the:

a. Different opinions the auditors are expressing on the components of the financial statements that each audited.
b. Group engagement partner’s recognition of the component auditor’s competence, reputation, and professional certification.
c. Lack of materiality of the portion of the financial statements audited by the other auditor.
d. Divided responsibility between the auditors who conducted the audits of the components of the overall financial statements.

Answer 13

Choice “d” is correct. Reference to a component auditor indicates division of responsibility for the audits of the components of the overall financial statements.

Question 14

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 auditor should:
a. Explicitly concur that the change is preferred.
b. Refer to the change in an explanatory paragraph.
c. Not refer to consistency in the auditor’s report.
d. Refer to the change in the opinion paragraph

Answer 14

Choice “c” is correct. If an accounting change has no material effect on the comparability of the financial statements, the auditor does not need to recognize the change in the current year’s audit report.

Question 15

Which paragraphs of an auditor’s report on financial statements under U.S. auditing standards should refer to generally
accepted auditing standards (GAAS) and generally accepted accounting principles (GAAP)?
GAAS GAAP
a. Auditor’s
Responsibility Introductory
b. Auditor’s
Responsibility Opinion
c. Introductory Auditor’s
Responsibility
d. Introductory Introductory

Answer 15

Choice “b” is correct. Under U.S. auditing standards, the auditor states that the audit was conducted in accordance with GAAS in the Auditor’s Responsibility paragraph. The auditor expresses an opinion on the financial statements’ conformity with GAAP in the Opinion paragraph.

Question 16

Management believes and the auditor is satisfied that a material loss probably will occur when pending litigation is resolved.
Management is unable to make a reasonable estimate of the amount or range of the potential loss, but fully discloses the
situation in the notes to the financial statements. If management does not make an accrual in the financial statements, the
auditor should express a(an):
a. Qualified opinion due to a material misstatement of the financial statements.
b. Unmodified opinion with an other-matter paragraph.
c. Qualified opinion due to a scope limitation.
d. Unmodified opinion.

Answer 16

Choice “d” is correct. If a contingent liability is probable, but not estimable, and it is disclosed in the footnotes, the auditor
should issue an unmodified opinion.

Question 17

An auditor decides to issue a qualified opinion on an entity’s financial statements because a major inadequacy in its
computerized accounting records prevents the auditor from applying necessary procedures. The opinion paragraph of the
auditor’s report should state that the qualification pertains to:
a. A departure from generally accepted auditing standards.
b. Inadequate disclosure of necessary information.
c. A client-imposed scope limitation.
d. The possible effects on the financial statements.

Answer 17

Choice “d” is correct. When an auditor qualifies his opinion because of a scope limitation, the wording in the opinion paragraph should indicate that the qualification pertains to the possible effects on the financial statements and not to the
scope limitation itself.

Question 18

Green, CPA, was engaged to audit the financial statements of Essex Co. after its fiscal year had ended. The timing of Green’s appointment as auditor and the start of fieldwork made confirmation of accounts receivable by direct communication with the debtors ineffective. However, Green applied other procedures and was satisfied as to the reasonableness of the account balances. Green’s auditor’s report most likely contained a(an):

a. Qualified opinion due to a departure from generally accepted auditing standards.
b. Unmodified opinion.
c. Qualified opinion due to a scope limitation.
d. Unmodified opinion with an emphasis-of-matter paragraph.

Answer 18

Choice “b” is correct. There is a presumption that the auditor will request the confirmation of accounts receivable during an audit unless accounts receivable are immaterial, the use of confirmations would be ineffective, or the assessed inherent risk
is so low that the evidence expected to be provided by analytical procedures or other substantive tests of details would be sufficient. In this example, the confirmation of accounts receivable by direct communication with the debtors would be
ineffective. If Green was able to apply alternative audit procedures and was satisfied as to the reasonableness of the account balances, then an unmodified opinion could be issued.

Question 19

In the auditor’s report under U.S. GAAS, the group engagement partner decides not to make reference to another CPA who audited a client’s subsidiary. The group engagement partner could justify this decision if, among other requirements, the
group engagement partner:
a. Learns that the component auditor issued an unmodified opinion on the subsidiary’s financial statements.
b. Is unable to review the audit programs and audit documentation of the component auditor.
c. Is satisfied as to the independence and professional reputation of the component auditor.
d. Issues an unmodified opinion on the consolidated financial statements.

Answer 19

Choice “c” is correct. Under U.S. GAAS, if, among other requirements, the group engagement partner is satisfied as to the
independence and the professional reputation of the component auditor, the group engagement partner may express an opinion on the financial statements taken as a whole without making reference to the audit of the component auditor.

Question 20

Jewel, CPA, audited Infinite Co.’s prior-year financial statements. These statements are presented with those of the current year for comparative purposes without Jewel’s auditor’s report, which expressed a qualified opinion. In drafting the current
year’s auditor’s report, Crain, CPA, the successor auditor, should:
I. Not name Jewel as the predecessor auditor.
II. Indicate the type of report issued by Jewel.
III. Indicate the substantive reasons for Jewel’s qualification.
a. I, II, and III.
b. II and III only.
c. I only.
d. I and II only.

Answer 20

Choice “a” is correct. If the financial statements of a prior period have been audited by a predecessor auditor whose report is not presented, the successor auditor should indicate in an Other-Matter paragraph of the report 1) that the financial
statements of the prior period were audited by another auditor, 2) the date of the previous report, 3) the type of report issued
by the predecessor auditor, and 4) if the report was other than an unmodified report, the substantive reasons therefor. The successor auditor may name the predecessor auditor only if the predecessor auditor’s practice was acquired by or merged
with that of the successor auditor.
Choices “c”, “d”, and “b” are incorrect, based on the above explanation.

Question 21

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. Indicate the substantive reasons for the qualification in the predecessor auditor’s opinion.
b. Issue an updated comparative audit report indicating the division of responsibility.
c. Express an opinion only on the current year’s statements and make no reference to the prior year’s statements.
d. Request the client to reissue the predecessor’s report on the prior year’s statements.

Answer 21

Choice “a” is correct. If the financial statements of a prior period have been audited by a predecessor auditor whose report is not presented, the successor auditor should indicate in an other-matter paragraph of the audit report
(1) that the financial statements of the prior period were audited by a predecessor auditor, (2) the type of opinion expressed by the predecessor auditor and, if the opinion was modified, the reasons for the modification, (3) the nature of any emphasis-of-matter or other-matter paragraph included in the predecessor auditor’s report, and (4) the date of the predecessor auditor’s report.

Question 22

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. Explain to the client that comparative financial statements may not be presented under these circumstances.
b. Indicate the substantive reasons for the qualification in the predecessor auditor’s opinion.
c. Express an opinion only on the current year’s financial statements and make no reference to the prior year’s statements.
d. Issue an updated comparative audit report indicating the division of responsibility.

Answer 22

Choice “b” is correct. When a predecessor auditor’s report is not presented, the successor auditor should indicate the
following items:
1. That the statements were audited by a predecessor auditor. The predecessor auditors should not be named unless the
practice of the predecessors was acquired by or merged with that of the successor.
2. The type of opinion expressed by the predecessor auditor and, if the opinion was modified, the reason for the
modification.
3. The nature of any emphasis-of-matter or other-matter paragraph included in the predecessor auditor’s report.
4. The date of the predecessor auditor’s report.

Question 23

Which of the following best describes what is meant by the term generally accepted auditing standards?
a. Pronouncements issued by the Auditing Standards Board.
b. Measures of the quality of the auditor’s performance.
c. Procedures to be used to gather evidence to support financial
statements.
d. Rules acknowledged by the accounting profession because of their
universal application.

Answer 23

Choice “b” is correct. Generally accepted auditing standards (“GAAS”) are measures of the quality of the auditor’s performance, and guide the auditor in the performance of a properly planned and executed audit.

Question 24

An auditor’s report contains the following sentences:
We did not audit the financial statements of JK Co., a wholly owned subsidiary, which statements reflect total assets and revenues
constituting 17 percent and 19 percent, respectively, of the related consolidated totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it
relates to the amounts included for JK Co., is based solely on the report of the other auditors.
These sentences:
a. Divide responsibility.
b. Disclaim an opinion.
c. Are an improper form of reporting.
d. Qualify the opinion.

Answer 24

Choice “a” is correct. The report indicates a division of responsibility.
Note that division of responsibility is permitted under U.S. auditing standards, but is generally not permitted under international auditing
standards.

Question 25

The auditor, in order to express an opinion, must
obtain a reasonable level of assurance about whether the financial statements are free from material misstatement, whether due to error or fraud. In order to obtain reasonable assurance, the auditor must?

Answer 25

(a) plan the work and properly supervise any assistants; (b) determine and apply appropriate materiality levels; (c) identify and assess risks of material misstatement, whether due to error or fraud; and (d) obtain sufficient appropriate audit evidence.

Question 26

The responsibilities of an auditor include:

Answer 26

• Complying with relevant ethical requirements.
• Appropriate competence and capabilities to perform the audit.
• Maintaining professional skepticism and exercising professional judgment throughout the planning and performance of the audit.

Question 27

Question CPA-02325
For an entity’s financial statements to be presented fairly in accordance with an applicable financial reporting framework, the framework selected should:
a. Include an adequate description of the framework in the financial statements.
b. Be U.S. GAAP, for all audits performed in the United States.
c. Match the reporting framework used by most other entities within the entity’s particular industry.
d. Be approved by the Auditing Standards Board or the appropriate industry subcommittee.

Answer 27

Choice “a” is correct. The preparation and fair presentation of the financial statements requires identification of the applicable financial reporting framework and inclusion of an adequate description of the framework, as well as preparation and fair presentation in accordance with the framework.

Question 28

In which of the following circumstances would an auditor most likely add an emphasis-of-matter paragraph to the report while not affecting the auditor’s unmodified opinion? a.There is substantial doubt about the entity’s ability to continue as a going concern. b.The auditor is asked to report on the balance sheet, but not on the other basic financial statements. c.Certain transactions cannot be tested because of management’s records retention policy. d.Management’s estimates of the effects of future events are unreasonable.

Answer 28

Choice “a” is correct. If, after considering identified conditions and events and management’s plans, the auditor concludes that substantial doubt about the entity’s ability to continue as a going concern for a reasonable period of time remains, the audit report should include an emphasis-of-matter paragraph to reflect that conclusion.

Question 29

To obtain reasonable assurance, an auditor should:

Answer 29

To obtain reasonable assurance, an auditor must

a. plan the work and properly supervise assistants,
b. as well as determine and apply appropriate materiality levels,
c. identify and assess risks of material misstatement whether due to fraud or error, d. and obtain sufficient appropriate audit evidence.

Question 30

The phrase “U.S. generally accepted accounting principles” is an accounting term that:

Answer 30

c. Encompasses the conventions, rules, and procedures necessary to define U.S. accepted accounting practice at a particular time.

Question 31

Which of the following actions should a CPA firm take to comply with the AICPA’s quality control standards?

a. Use attributes sampling techniques in testing internal controls.
b. Establish policies to ensure that the audit work meets applicableprofessional standards.
c. Consider inherent risk and control risk before determining detectionrisk.
d. Establish procedures that comply with the standards of the Sarbanes-Oxley Act.

Answer 31

Choice “b” is correct. A quality control system consists of policies and procedures designed, implemented, and maintained to ensure that the firm complies with professional standards and appropriate legal and regulatory requirements, and that any reports issued are appropriate in the circumstances.