A1 Audit Reports Flashcards
1
Q
Which of the following provides the most authoritative guidance for the auditor of a nonissuer?
A. Specific guidance provided by an interpretation of a Statement on Auditing Standards.
B. General guidance provided by a Statement on Auditing Standards.
C. An AICPA audit and accounting guide that provides specific guidance with respect to the accounting practices in the client’s industry.
D. A Journal of Accountancy article discussing implementation of a new standard.
A
B. General guidance provided by a Statement on Auditing Standards
2
Q
Which of the following best describes what is meant by the term generally accepted auditing standards?
A. Procedures to be used to gather evidence to support financial statements.
B. Measures of the quality of the auditor’s performance.
C. Rules acknowledged by the accounting profession because of their universal application.
D. Pronouncements issued by the Auditing Standards Board
A
B. Measures of the quality of the auditor’s performance.
3
Q
An auditor of a nonissuer must conduct the audit in accordance with:
I. ASB standards.
II. PCAOB standards.
A
I. ASB standards
4
Q
The phrase “U.S. generally accepted accounting principles” is an accounting term that:
A. Is included in the audit report to indicate that the audit has been conducted in accordance with generally accepted auditing standards (GAAS).
B. Provides a measure of conventions, rules, and procedures governed by the AICPA.
C. Includes broad guidelines of general application but not detailed practices and procedures.
D. Encompasses the conventions, rules, and procedures necessary to define U.S. accepted accounting practice at a particular time.
A
D. Encompasses the conventions, rules, and procedures necessary to define U.S. accepted accounting practice at a particular time.
5
Q
Which of the following accurately depicts the auditor’s responsibility with respect to Statements on Auditing Standards?
A. The auditor is generally required to follow the guidance provided by the Standards, and should be able to justify any departures.
B. The auditor is generally required to follow the guidance provided by the Standards, unless following such guidance would result in an audit that is not cost-effective.
C. The auditor is required to follow the guidance provided by the Standards, without exception.
D. The auditor is generally required to follow the guidance provided by Standards with which he or she is familiar, but will not be held responsible for departing from provisions of which he or she was unaware.
A
A. The auditor is generally required to follow the guidance provided by the Standards, and should be able to justify any departures.
6
Q
Which of the following terms used within standards indicates a presumptively mandatory requirement?
A. Might
B. May
C. Must
D. Should
A
D. Should
7
Q
When a PCAOB auditing standard indicates that an auditor “could” perform a specific procedure, how should the auditor decide whether and how to perform the procedure?
A. By evaluating whether the audit is likely to be subject to inspection by the PCAOB.
B. By soliciting input from the issuer’s audit committee.
C. By comparing the PCAOB standard with related AICPA auditing standards.
D. By exercising professional judgment in the circumstances.
A
D. By exercising professional judgment in the circumstances.
8
Q
Which of the following is not an example of the application of professional skepticism?
A. Inquiring of prior year engagement personnel regarding their assessment of management’s honesty and integrity.
B. Using third-party confirmations to provide support for management’s representations.
C. Designing additional auditing procedures to obtain more reliable evidence in support of a particular financial statement assertion.
D. Obtaining corroboration of management’s explanations through consultation with a specialist.
A
A. Inquiring of prior year engagement personnel regarding their assessment of management’s honesty and integrity.
9
Q
The responsibilities of an auditor include all of the following except which one?
A. Complying with relevant ethical requirements.
B. Maintaining professional skepticism and exercising professional judgment throughout the planning and performance of the audit.
C. Appropriate competence and capabilities to perform the audit.
D. A minimum amount of technical knowledge of and experience in the industry in which the audit client operates.
A
D. A minimum amount of technical knowledge of and experience in the industry in which the audit client operates.
10
Q
Which of the following statements is correct concerning an auditor’s responsibilities regarding financial statements?
A. An auditor’s responsibilities for audited financial statements are confined to the expression of the auditor’s opinion.
B. Making suggestions that are adopted about an entity’s internal control environment impairs an auditor’s independence.
C. An auditor may not draft an entity’s financial statements based on information from management’s accounting system.
D. The adoption of sound accounting policies is an implicit part of an auditor’s responsibilities.
A
A. An auditor’s responsibilities for audited financial statements are confined to the expression of the auditor’s opinion.
11
Q
An auditor of a nonissuer exercising professional skepticism with respect to the risks of material misstatement due to fraud will most appropriately:
A. Consider the reliability of information to be used as audit evidence.
B. Assess the entity’s document-retention controls before using documents as audit evidence.
C. Adopt an attitude of acceptance unless evidence indicates otherwise.
D. Authenticate documents used as audit evidence.
A
A. Consider the reliability of information to be used as audit evidence.
12
Q
In certain audit engagements, the auditor may be required to comply with auditing requirements in addition to GAAS. The auditor may conduct the audit in accordance with:
A. Only GAAS or PCAOB, but not auditing standards of another jurisdiction or country.
B. International Standards on Auditing, but only if the audit is being conducted in another country outside the U.S.A.
C. Both GAAS and government auditing standards (GAGAS)
D. Either GAAS as issued by the AICPA or PCAOB Standards, but not both.
A
A. Only GAAS or PCAOB, but not auditing standards of another jurisdiction or country.
13
Q
In order to express an opinion, the auditor obtains a level of assurance about whether the financial statements are free from material misstatement, whether due to error or fraud. Which of the following is required of the auditor in obtaining this level of assurance?
A. Determine the applicable financial reporting framework and prepare an adequate description of the framework for inclusion in the financial statements.
B. Exercise his or her specific legal powers and authority in investigating suspicious activities of the entity’s employees, including management.
C. Plan the work and properly supervise any assistants.
D. Obtain absolute assurance that the financial statements are not misstated due to fraud on the part of management.
A
C. Plan the work and properly supervise any assistants.
14
Q
Which of the following terms identifies a requirement for audit evidence?
A. Reasonable.
B. Disconfirming.
C. Appropriate.
D. Adequate.
A
C. Appropriate.
15
Q
An auditor of a nonissuer concludes that a client’s illegal act, which has a material effect on the financial statements, has not been properly accounted for or disclosed. Depending on the pervasiveness of the effect on the financial statements, the auditor should express either a (an):
A. Disclaimer of opinion or an unmodified opinion with an emphasis-of-matter paragraph.
B. Qualified opinion or an adverse opinion.
C. Adverse opinion or a disclaimer of opinion.
D. Unmodified opinion with an other-matter paragraph or a qualified opinion.
A
B. Qualified opinion or an adverse opinion.
16
Q
In order to form an opinion on the financial statements, the auditor should consider whether:
A. Management has correctly identified the appropriate auditing standards.
B. The financial statements are prepared, in all material respects, in accordance with the requirements of generally accepted auditing standards (GAAS).
C. Sufficient appropriate evidence was obtained as required by the Financial Accounting Standards Board (FASB).
D. The financial statements are prepared, in all material respects, in accordance with the requirements of the applicable financial reporting framework.
A
D. The financial statements are prepared, in all material respects, in accordance with the requirements of the applicable financial reporting framework.
17
Q
When forming an opinion on the financial statements, the auditor is least likely to evaluate whether:
A. Earnings forecasts by investors are met.
B. Financial statements provide adequate disclosures to enable intended users to understand the effect of material events and transactions.
C. Accounting estimates made by management are reasonable.
D. The terminology used in the financial statements is appropriate.
A
A. Earnings forecasts by investors are met.
18
Q
If comparative information is presented in a nonissuer’s financial statements and the audit client asks the auditor to express an opinion on all periods presented, then the auditor should first:
A. Issue a separate audit report on the prior period information with an appropriate expression of opinion.
B. Request additional written representations from management identifying the substantive reasons that the entity wants to have an opinion, including the prior period information.
C. Consider whether the information included for the prior period contains sufficient detail to constitute a fair presentation in accordance with the applicable financial reporting framework.
D. Consider including an additional paragraph in the audit report disclosing the request by management for the auditor to express an opinion including the prior period information.
A
C. Consider whether the information included for the prior period contains sufficient detail to constitute a fair presentation in accordance with the applicable financial reporting framework.
19
Q
Which of the following best describes when an auditor most likely would modify the audit opinion?
A. The entity selects IFRS as the applicable financial reporting framework.
B. The auditor concludes that the financial statements as a whole are materially misstated.
C. The auditor identifies an immaterial misstatement in the financial statements.
D. The auditor concludes that the financial statements are presented fairly.
A
B. The auditor concludes that the financial statements as a whole are materially misstated.
20
Q
Which of the following factors should most influence an auditor’s decision to modify the audit opinion of an issuer’s financial statements?
A. Whether the auditor’s opinion is based in part on the report of another auditor.
B. The effect of a misstatement on the financial statements taken as a whole.
C. The types of users expected to rely on the financial statements.
D. Uncertainties related to management’s estimates as of the reporting date that are adequately disclosed in the footnotes to the financial statements.
A
B. The effect of a misstatement on the financial statements taken as a whole.
21
Q
A client’s fixed asset experienced a significant impairment loss but the client refuses to record the impairment loss in the financial statements. Which of the following opinions is an auditor most likely to issue if the amount of loss is material but not pervasive to the financial statements?
A. Adverse opinion
B. Qualified opinion
C. Unmodified opinion
D. Disclaimer opinion
A
B. Qualified opinion
22
Q
The opinion paragraph in an auditor’s report for a nonissuer should include a statement that:
A. Identifies the applicable financial reporting framework and its origin.
B. Includes the word independent to clearly indicate that the report is from an independent auditor.
C. Describes the auditor’s responsibility for expressing an opinion on the financial statements.
D. Indicates that management is responsible for the fair presentation of the financial statements.
A
A. Identifies the applicable financial reporting framework and its origin.
23
Q
In which of the following sections of an auditor’s report for a nonissuer does an auditor communicate the nature of the engagement and the specific financial statements covered by the audit?
A. Opinion
B. Scope
C. Basis for Opinion
D. Emphasis-of-matter
A
A. Opinion
24
Q
A client decides not to make an auditor’s proposed adjustments that collectively are not material, and wants the auditor to issue the report based on the unadjusted numbers. Which of the following statements is correct regarding the financial statement presentation?
A. The financial statements contain unadjusted misstatements that should result in a qualified opinion.
B. The financial statements are free from material misstatement, and no disclosure is required in the notes to the financial statements.
C. The financial statements do not conform with generally accepted accounting principles (GAAP).
D. The financial statements are free from material misstatement, but disclosure of the proposed adjustments is required in the notes to the financial statements.
A
B. The financial statements are free from material misstatement, and no disclosure is required in the notes to the financial statements.
25
An auditor's responsibility to express an opinion on the financial statements of a nonissuer under U.S. auditing standards is:
A. Explicitly represented in the Basis for Opinion paragraph of the auditor's report.
B. Implicitly represented in the auditor's report.
C. Explicitly represented in the Auditor's Responsibility paragraph.
D. Explicitly represented in an emphasis-of-matter paragraph of the auditor's report.
C. Explicitly represented in the Auditor's Responsibility paragraph.
26
Block, a CPA firm, is finalizing the audit of a nonissuer. In drafting the audit report containing an unmodified opinion, how should Block make the following representations in the audit opinion on comparative financial statements?
Consistent application of accounting principles
Examination of evidence on a test basis
Consistent application of accounting principles: Implicitly
Examination of evidence on a test basis: Explicitly
27
Which of the following best describes the earliest date for an auditor's report?
A. The date audit documentation was completed.
B. The last day of audit fieldwork.
C. The date all audit procedures have been completed and the audit file has been assembled.
D. The date the auditor has obtained sufficient appropriate audit evidence to support the opinion.
D. The date the auditor has obtained sufficient appropriate audit evidence to support the opinion.
28
A CPA's report on audited financial statements under U.S. auditing standards would be inappropriate if it referred to:
A. Significant estimates made by management.
B. Management's responsibility for the financial statements.
C. Evaluating the appropriateness of accounting policies used.
D. The CPA's assessment of sampling risk factors.
D. The CPA's assessment of sampling risk factors.
29
Which of the following statements is a basic element of the auditor's report under U.S. auditing standards?
A. An audit includes evaluating the reasonableness of significant accounting estimates made by management.
B. The disclosures provide reasonable assurance that the financial statements are free of material misstatement.
C. The auditor evaluated the overall internal control.
D. The financial statements are consistent with those of the prior period.
A. An audit includes evaluating the reasonableness of significant accounting estimates made by management.
30
How are management's responsibility and the auditor's responsibility represented in the auditor's report of a nonissuer?
Management's Responsibility
Auditor's Responsibility
Management's Responsibility: Explicitly
Auditor's Responsibility: Explicitly
31
Riley, a CPA firm, is performing an audit in accordance with U.S. generally accepted auditing standards. Riley's client is Michelson Inc., a U.S.-based company that has identified U.S. generally accepted accounting principles as the applicable financial reporting framework. In which sections of the auditor's report should Riley refer to U.S. generally accepted accounting principles (GAAP)?
A. Opinion and Management's Responsibility
B. Opinion and Basis for Opinion
C. Basis for Opinion and Auditor's Responsibility
D. Management's Responsibility and Auditor's Responsibility
A. Opinion and Management's Responsibility
32
Which of the following items is explicitly included in an audit report expressing an unmodified opinion?
A. We conducted our audit in accordance with generally accepted accounting principles.
B. We identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks.
C. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our review of the financial statements.
D. The procedures selected depend on management's approval, including the assessment of the risks of any errors resulting from fraud.
B. We identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks.
33
In an audit of an issuer, which of the following occasions is the earliest an audit report may be dated?
A. When the auditor has obtained sufficient appropriate audit evidence to support an opinion.
B. When the auditor completes field work and all audit documentation has been reviewed.
C. When the financial statements are filed with the Securities and Exchange Commission (SEC).
D. When all working papers are compiled and assembled, and all superseded documentation has been deleted.
A. When the auditor has obtained sufficient appropriate audit evidence to support an opinion.
34
In an audit of an issuer, an auditor is least likely to include which of the following information related to a critical audit matter in the audit report?
A. A statement that disclaims the auditor's responsibility for critical audit matters.
B. Description of the principal considerations that led the auditor to determine that the matter was a critical audit matter.
C. Description of how the critical audit matter was addressed in the audit.
D. Reference to relevant financial statement accounts that relate to the critical audit matter.
A. A statement that disclaims the auditor's responsibility for critical audit matters.
35
Which of the following is true regarding the audit report for an issuer?
A. The report should include references to PCAOB standards and generally accepted accounting principles.
B. Reference should be made to both PCAOB standards and generally accepted auditing standards.
C. PCAOB standards should not be mentioned at all, although their use is implied in the auditor's report.
D. Reference may be made to either PCAOB standards or generally accepted auditing standards.
A. The report should include references to PCAOB standards and generally accepted accounting principles.
36
A critical audit matter is a matter that was communicated or is required to be communicated to the audit committee and:
A. Requires a significantly larger sample size to test.
B. Relates to accounts or disclosures that are immaterial to the financial statements.
C. Involves a particularly complex transaction approved by management.
D. Involves an especially challenging judgment made by the auditor.
D. Involves an especially challenging judgment made by the auditor.
37
When financial statements contain a departure from U.S. GAAP because, due to unusual circumstances, the statements would otherwise be misleading, the auditor should express an opinion that is:
A. Qualified.
B. Adverse.
C. Qualified or adverse, depending on pervasiveness.
D. Unmodified.
D. Unmodified.
38
Which of the following phrases would an auditor of a nonissuer most likely include in the auditor's report when expressing a qualified opinion due to inadequate disclosure?
A. With the foregoing explanation of these omitted disclosures.
B. Subject to the departure from generally accepted accounting principles, as described above.
C. Do not present fairly.
D. Except for the omission of the information described in the basis for qualified opinion section.
D. Except for the omission of the information described in the basis for qualified opinion section.
39
In which case would an unmodified opinion not be appropriate?
A. There is a justified departure from GAAP.
B. A material related party transaction has occurred and has been accounted for appropriately, but it has not been adequately disclosed in the financial statements.
C. There is an unjustified departure from GAAP, but it does not have a material effect on the financial statements.
D. There is a change in accounting principle that has a material effect on the current year financial statements.
B. A material related party transaction has occurred and has been accounted for appropriately, but it has not been adequately disclosed in the financial statements.
40
Which of the following situations best describes when an auditor should express an adverse opinion?
A. The auditor obtained sufficient appropriate audit evidence and concludes that misstatements are both material and pervasive to the financial statements.
B. The auditor obtained sufficient appropriate audit evidence and concludes that misstatements are material but not pervasive to the financial statements.
C. The auditor obtains sufficient appropriate audit evidence and concludes that the financial statements are presented fairly.
D. The auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, and the auditor concludes that the possible effects on the financial statements of undetected misstatements could be both material and pervasive.
A. The auditor obtained sufficient appropriate audit evidence and concludes that misstatements are both material and pervasive to the financial statements.
41
Under which of the following circumstances would the expression of an adverse opinion be inappropriate?
A. Management does not provide reasonable justification for a change in accounting principles.
B. The company issues financial statements that purport to present financial position and results of operations, but it refuses to include the related statement of cash flows.
C. The financial statements do not adequately disclose litigation that is probable to result in a material loss.
D. Management refuses to allow the auditor to contact legal counsel.
D. Management refuses to allow the auditor to contact legal counsel.
42
A client has capitalizable leases but refuses to capitalize them in the financial statements. Which of the following reporting options does an auditor have if the amounts pervasively distort the financial statements?
A. Unmodified opinion.
B. Qualified opinion.
C. Adverse opinion.
D. Disclaimer opinion.
C. Adverse opinion.
43
In which of the following circumstances would an auditor be most likely to express an adverse opinion?
A. Tests of controls show that the entity's internal control is so poor that it cannot be relied upon.
B. The chief executive officer refuses the auditor access to minutes of board of directors' meetings.
C. Information comes to the auditor's attention that raises substantial doubt about the entity's ability to continue as a going concern.
D. The financial statements are not in conformity with the GAAP rules regarding the capitalization of leases.
D. The financial statements are not in conformity with the GAAP rules regarding the capitalization of leases.
44
An auditor most likely would issue an adverse opinion due to:
A. Inadequate disclosure of material information.
B. Management’s refusal to provide written representations.
C. The auditor is unable to obtain the audited financial statements of a consolidated investee.
D. The inability to determine the extent of or the amounts associated with a pervasive employee fraud scheme
A. Inadequate disclosure of material information.
45
If a publicly held company issues financial statements that purport to present its financial position and results of operations but omits the statement of cash flows, the auditor ordinarily will express a(an):
A. Qualified opinion.
B. Disclaimer of opinion.
C. Unmodified opinion with an emphasis-of-matter paragraph.
D. Review report.
A. Qualified opinion.
46
Under which of the following circumstances would a disclaimer of opinion not be appropriate?
A. The client refuses to permit its attorney to furnish information requested in a letter of audit inquiry.
B. The financial statements fail to contain adequate disclosure of related party transactions.
C. The auditor is unable to determine the amounts associated with illegal acts committed by the client's management.
D. The auditor is engaged after fiscal year-end and is unable to observe physical inventories or apply alternative procedures to verify their balances.
B. The financial statements fail to contain adequate disclosure of related party transactions.
47
Under which of the following circumstances would the expression of a disclaimer of opinion be inappropriate?
A. Management does not provide reasonable justification for a change in accounting principles.
B. The auditor is unable to obtain the audited financial statements of a consolidated investee.
C. Management refuses to allow the auditor to have access to the company's canceled checks and bank statements.
D. The company failed to make a count of its physical inventory during the year and the auditor was unable to apply alternative procedures to verify inventory quantities.
A. Management does not provide reasonable justification for a change in accounting principles.
48
Zag Co. issues financial statements that present financial position and results of operations but Zag omits the related statement of cash flows. Zag would like to engage Brown, CPA, to audit its financial statements without the statement of cash flows although Brown's access to all of the information underlying the basic financial statements will not be limited. Under these circumstances, Brown most likely would:
A. Refuse to accept the engagement as proposed because of the client-imposed scope limitation.
B. Add an emphasis-of-matter paragraph to the auditor's report that justifies the reason for the omission.
C. Prepare the statement of cash flows as an accommodation to Zag and express an unmodified opinion.
D. Explain to Zag that the omission requires a qualification of the auditor's opinion.
D. Explain to Zag that the omission requires a qualification of the auditor's opinion.
49
When an auditor of a nonissuer qualifies an opinion because of inadequate disclosure, the auditor should describe the nature of the omission in a separate paragraph and modify the:
-Auditors Responsibility Section:
-Opinion Section:
-Auditors Responsibility Section: No
-Opinion Section: Yes
50
When an auditor of a nonissuer expresses an adverse opinion, the Opinion section should include:
A. A direct reference to a separate section disclosing the basis for the opinion.
B. The principal effects of the departure from generally accepted accounting principles.
C. A description of the uncertainty or scope limitation that prevents an unmodified opinion.
D. The substantive reasons for the financial statements being incorrect or misleading.
A. A direct reference to a separate section disclosing the basis for the opinion.
51
An auditor of a nonissuer should disclose the substantive reasons for expressing an adverse opinion in a Basis for Adverse Opinion section:
A. Following the Opinion section.
B. Preceding the introductory paragraph.
C. Within the notes to the financial statements.
D. Preceding the Opinion section.
A. Following the Opinion section.
52
Under which of the following circumstances would a disclaimer of opinion not be appropriate?
A. The client refuses to permit the auditor to confirm certain accounts receivable or apply alternative procedures to verify their balances.
B. The chief executive officer is unwilling to sign the management representation letter.
C. The auditor is unable to determine the amounts associated with an employee fraud scheme.
D. Management does not provide reasonable justification for a change in accounting principle.
D. Management does not provide reasonable justification for a change in accounting principle.
53
When qualifying an opinion due to an inability to obtain sufficient appropriate audit evidence, an auditor of a nonissuer should include the reasons for that inability to obtain sufficient information in:
Management's Responsibility Section:
Basis for Qualified Opinion Section:
Management's Responsibility Section: No
Basis for Qualified Opinion Section: Yes
54
An auditor may issue a qualified opinion under which of the following circumstances?
Lack of sufficient appropriate audit evidence:
Restrictions of the scope of the audit:
Lack of sufficient appropriate audit evidence: Yes
Restrictions of the scope of the audit: Yes
55
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 scope limitation.
B. Qualified opinion due to a departure from generally accepted auditing standards.
C. Unmodified opinion.
D. Unmodified opinion with an emphasis-of-matter paragraph.
C. Unmodified opinion.
56
Morris, CPA, suspects that a pervasive scheme of illegal bribes exists throughout the operations of Worldwide Import-Export, Inc., a new audit client. Morris notified the audit committee and Worldwide's legal counsel, but neither could assist Morris in determining whether the amounts involved were material to the financial statements or whether senior management was involved in the scheme. Under these circumstances, Morris should:
A. Express an adverse opinion on the financial statements.
B. Issue a special report regarding the illegal bribes.
C. Express an unmodified opinion with an other-matter paragraph.
D. Disclaim an opinion on the financial statements.
D. Disclaim an opinion on the financial statements.
57
A scope limitation sufficient to preclude an unmodified opinion always will result when management:
A. Requests that certain material accounts receivable not be confirmed.
B. Refuses to acknowledge its responsibility for the fair presentation of the financial statements in conformity with GAAP.
C. Prevents the auditor from reviewing the audit documentation of the predecessor auditor.
D. Engages the auditor after the year-end physical inventory is completed.
B. Refuses to acknowledge its responsibility for the fair presentation of the financial statements in conformity with GAAP.
58
An auditor most likely would issue a disclaimer of opinion because of:
A. A material departure from generally accepted accounting principles.
B. Management's refusal to furnish written representations.
C. Inadequate disclosure of material information.
D. The omission of the statement of cash flows.
B. Management's refusal to furnish written representations.
59
The auditor may not issue a qualified opinion when:
A. The auditor is not independent with respect to the audited entity.
B. The auditor is unable to observe a physical inventory count.
C. The financial statements contain a material departure from generally accepted accounting principles.
D. A scope limitation prevents the auditor from completing an important procedure.
A. The auditor is not independent with respect to the audited entity.
60
Under which of the following circumstances would an auditor most likely issue either a qualified or a disclaimer of opinion?
A. There is substantial doubt about the entity's ability to continue as a going concern.
B. The client's attorney refused to respond to the letter of audit inquiry.
C. The financial statements contain an immaterial departure from generally accepted accounting principles (GAAP).
D. The auditor performed alternative substantive procedures to provide adequate assurance due to missing documentation.
B. The client's attorney refused to respond to the letter of audit inquiry.
61
Management refuses to allow an auditor to observe inventory. Inventory accounts for 60% of the entity’s assets. Alternative auditing procedures cannot be applied. Based on this information, the auditor should:
A. Issue an unmodified with an other-matter paragraph.
B. Issue a qualified or adverse opinion.
C. Issue an unmodified opinion with an emphasis-of-matter paragraph.
D. Issue a disclaimer of opinion or withdraw from the engagement.
D. Issue a disclaimer of opinion or withdraw from the engagement.
62
A limitation on the scope of an audit sufficient to preclude an unmodified opinion will usually result when management:
A. Does not provide the auditor with an engagement letter specifying the responsibilities of both the entity and the auditor.
B. Fails to correct a significant deficiency in internal control communicated to those charged with governance after the prior year's audit.
C. Is unable to obtain audited financial statements supporting the entity's investment in a foreign subsidiary.
D. Refuses to disclose in the notes to the financial statements related party transactions authorized by the Board of Directors.
C. Is unable to obtain audited financial statements supporting the entity's investment in a foreign subsidiary.
63
An auditor was unable to obtain sufficient appropriate audit evidence concerning certain transactions due to an inadequacy in the entity's accounting records. The auditor would choose between issuing a(an):
A. Adverse opinion and a disclaimer of opinion.
B. Disclaimer of opinion and a qualified opinion.
C. Qualified opinion and an unmodified opinion with an emphasis-of-matter paragraph.
D. Unmodified opinion with an emphasis-of-matter paragraph and an adverse opinion.
B. Disclaimer of opinion and a qualified opinion.
64
If an auditor is unable to determine whether management's estimate of the effects of future events is reasonable, and the effect of those events is believed to be material, he or she should express:
A. An unmodified opinion with an emphasis-of-matter paragraph following the opinion paragraph.
B. An unmodified opinion with no additional paragraphs.
C. A qualified opinion or an adverse opinion.
D. A qualified opinion or a disclaimer of opinion.
D. A qualified opinion or a disclaimer of opinion.
65
During an audit, the auditor sent the client's attorney a letter of inquiry for any pending litigation or unasserted claims. The attorney returned the letter, indicating that the attorney would not respond to the inquiry. Under these circumstances the auditor most likely would:
A. Increase tests of controls concerning the related liability account
B. Consider the impact of a scope limitation
C. Place increased reliance on information obtained from management
D. Obtain information concerning contingency guarantees from bank confirmations
B. Consider the impact of a scope limitation
66
When a qualified opinion results from a limitation on the scope of the audit of a nonissuer, the situation should be described in a Basis for Modification paragraph:
A. Following the opinion paragraph and referred to only in the management's responsibility paragraph of the auditor's report.
B. Following the Opinion section, should have the heading "Basis for Qualified Opinion" and should describe the reasons for the inability to obtain sufficient appropriate audit evidence.
C. Preceding the opinion paragraph and referred to only in the introductory paragraph of the auditor's report.
D. Following the opinion paragraph and referred to in both the introductory and opinion paragraphs of the auditor's report.
B. Following the Opinion section, should have the heading "Basis for Qualified Opinion" and should describe the reasons for the inability to obtain sufficient appropriate audit evidence.
67
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. The possible effects on the financial statements.
B. Inadequate disclosure of necessary information.
C. A client-imposed scope limitation.
D. A departure from generally accepted auditing standards.
A. The possible effects on the financial statements.
68
When an auditor of a nonissuer qualifies an opinion because of the inability to confirm accounts receivable by direct communication with debtors, the wording of the qualified opinion paragraph of the auditor's report should indicate that the qualification pertains to the:
A. Lack of sufficient appropriate audit evidence.
B. Departure from generally accepted auditing standards.
C. Limitation on the auditor's scope.
D. Possible effects on the financial statements.
D. Possible effects on the financial statements.
69
Management of a nonissuer 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. Unmodified opinion with an other-matter paragraph.
B. Qualified opinion due to a material misstatement of the financial statements.
C. Qualified opinion due to a scope limitation.
D. Unmodified opinion.
D. Unmodified opinion.
70
For which of the following events would an auditor issue a report that omits any reference to consistency?
A. A change in the useful life used to calculate the provision for depreciation expense.
B. A change from an accounting principle that is not generally accepted to one that is generally accepted that has a material impact on the financial statements.
C. A material change in the method of accounting for inventories.
D. Management's lack of reasonable justification for a change in accounting principle.
A. A change in the useful life used to calculate the provision for depreciation expense.
71
An auditor would express an unmodified opinion with an emphasis-of-matter paragraph added to the auditor's report for:
An unjustified accounting change:
A material weakness in internal control:
An unjustified accounting change: No
A material weakness in internal control: No
72
When an entity changes its method of accounting for income taxes, which has a material effect on comparability, the auditor should refer to the change in an emphasis-of-matter paragraph added to the auditor's report. This paragraph should identify the nature of the change and:
A. State the auditor's explicit concurrence with or opposition to the change.
B. Describe the cumulative effect of the change on the audited financial statements.
C. Explain why the change is justified under generally accepted accounting principles.
D. Refer to the financial statement note that discusses the change in detail.
D. Refer to the financial statement note that discusses the change in detail.
73
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. Management's estimates of the effects of future events are unreasonable.
B. To describe a material but justified change in accounting principle.
C. The auditor is asked to report on the balance sheet, but not on the other basic financial statements.
D. Certain transactions cannot be tested because of management's records retention policy.
B. To describe a material but justified change in accounting principle.
74
An auditor’s report for financial statements prepared using the special purpose framework of the cash basis of accounting contains the following title and sentences:
Basis of Accounting
We draw attention to Note X of the financial statements, which describes the basis of accounting. The financial statements are prepared on the cash basis of accounting, which is a basis of accounting other than accounting principles generally accepted in the United States of America. Our opinion is not modified with respect to this matter.
This title and sentences:
A. Represent an other-matter paragraph.
B. Represent an emphasis-of-matter paragraph.
C. Are an improper form of reporting.
D. Should appear prior to the opinion paragraph and explain the reason for a modified opinion.
B. Represent an emphasis-of-matter paragraph.
75
An emphasis-of-matter paragraph is required when:
A. An entity appropriately changed the accounting for investments from the cost method to the equity method. This change had a material effect on the financial statements.
B. The entity is engaged in an unusually important lawsuit that may result in a significant loss.
C. A major catastrophe has a significant effect on the entity’s financial position.
D. The entity engages in significant related party transactions.
A. An entity appropriately changed the accounting for investments from the cost method to the equity method. This change had a material effect on the financial statements.
76
An auditor includes a separate paragraph in an otherwise unmodified report to emphasize that the entity being reported on had significant transactions with related parties. The inclusion of this separate paragraph:
A. Necessitates a revision of the opinion paragraph to include the phrase "with the foregoing explanation."
B. Violates generally accepted auditing standards if this information is already disclosed in footnotes to the financial statements.
C. Is considered an "except for" qualification of the opinion.
D. Is appropriate and would not negate the unmodified opinion.
D. Is appropriate and would not negate the unmodified opinion.
77
Management believes, and the auditor is satisfied, that a pending lawsuit is reasonably possible to result in a material loss of $100,000. The lawsuit has been adequately disclosed in the notes to the financial statements; however, no loss amount has been accrued related to the pending lawsuit. If management does not make an accrual in the financial statements, the auditor should express a(n):
A. Unmodified opinion with an emphasis-of-matter paragraph.
B. Qualified or disclaimer.
C. Qualified or adverse opinion.
D. Unmodified opinion.
D. Unmodified opinion.
78
It is not appropriate to refer a reader of an auditor's report to a financial statement footnote for details concerning:
A. Sale of a discontinued operation.
B. The pro forma effects of a business combination.
C. Subsequent events.
D. The results of confirmation of receivables.
D. The results of confirmation of receivables.
79
Which of the following is true?
A. If an auditor believes there is substantial doubt about an entity's ability to continue as a going concern remains, and management has properly disclosed the situation, the auditor may not issue an unmodified opinion.
B. When a material accounting change has been properly accounted for and disclosed, the auditor may not issue an unmodified opinion.
C. When an auditor includes a paragraph emphasizing a significant related party transaction, the opinion would be considered a qualified opinion.
D. The auditor may issue an unmodified opinion when a correction of an error in accounting principle occurs.
D. The auditor may issue an unmodified opinion when a correction of an error in accounting principle occurs.
80
An auditor most likely would add an other-matter paragraph when:
A. A change in a reporting entity results in financial statements which, in effect, are those of a different reporting entity.
B. Current period financial statements are audited and presented in comparative form with reviewed financial statements from the prior period.
C. The auditor concludes that substantial doubt remains about the entity’s ability to continue as a going concern for a reasonable amount of time.
D. The entity changes the depreciable life of an asset from eight years to five years.
B. Current period financial statements are audited and presented in comparative form with reviewed financial statements from the prior period.
81
In which of the following circumstances may an auditor include an other-matter paragraph in an audit report of a nonissuer?
A. The audited financial statements include a material misstatement.
B. The entity engaged in significant transactions with a related party during the year under audit and subsequent to year-end.
C. A material weakness in internal control exists.
D. The auditor has been engaged to report on an entity's financial statements prepared under U.S. GAAP and under IFRS.
D. The auditor has been engaged to report on an entity's financial statements prepared under U.S. GAAP and under IFRS.
82
In an audit of an issuer's financial statements, the auditor determined that there was substantial doubt about the issuer's ability to continue as a going concern for a reasonable period of time. If there were no other significant audit findings, which of the following indicates the proper form of the audit report that should be issued?
A. An unqualified opinion with an explanatory paragraph.
B. An adverse opinion with an other-matter paragraph.
C. A disclaimer of opinion.
D. A qualified opinion with an emphasis-of-matter paragraph.
A. An unqualified opinion with an explanatory paragraph.
83
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.
B. Not refer to consistency in the auditor's report.
84
In which of the following should an auditor's report for a nonissuer refer to the lack of consistency when there is a justified change in accounting principle that is significant?
A. An emphasis-of-matter paragraph.
B. The Opinion section.
C. The Basis for Opinion section.
D. An other-matter paragraph.
A. An emphasis-of-matter paragraph.
85
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. Refer to the change in the opinion paragraph.
B. Refer to the change in an emphasis-of-matter paragraph.
C. Explicitly concur that the change is preferred.
D. Not refer to consistency in the auditor's report.
D. Not refer to consistency in the auditor's report.
86
When reporting on comparative financial statements, an auditor ordinarily should change the previously issued opinion on the prior year's financial statements if the:
A. Auditor is a predecessor auditor who has been requested by a former client to reissue the previously issued report.
B. Prior year's opinion was unmodified and the opinion on the current year's financial statements is modified due to a lack of consistency.
C. Prior year's financial statements are restated to conform with generally accepted accounting principles.
D. Prior year's financial statements are restated following a change in reporting entity in the current year.
C. Prior year's financial statements are restated to conform with generally accepted accounting principles.
87
Comparative financial statements include the prior year's statements that were audited by a predecessor auditor whose report is not presented. If the predecessor's report was unmodified, the successor should:
A. Express an opinion only on the current year's financial statements and make no reference to the prior year's financial statements.
B. Indicate in an other-matter paragraph that the predecessor auditor expressed an unmodified opinion on the prior year's financial statements.
C. Add an emphasis-of-matter paragraph that expresses only limited assurance concerning the fair presentation of the prior year's financial statements.
D. Obtain a letter of representation from the predecessor auditor concerning any matters that might affect the successor's opinion.
B. Indicate in an other-matter paragraph that the predecessor auditor expressed an unmodified opinion on the prior year's financial statements.
88
The group auditor decides not to refer to the component auditor who audited a subsidiary of the group auditor's client. In this situation, the group auditor most likely would:
A. Document in the engagement letter that the group auditor assumes no responsibility for the component auditor's work and opinion.
B. Obtain written permission from the component auditor to omit the reference in the group auditor's report.
C. Add an emphasis-of-matter paragraph to the auditor's report indicating that the subsidiary's financial statements are not material to the consolidated financial statements.
D. Determine the type of work to be performed by the group auditor on the financial information of the component.
D. Determine the type of work to be performed by the group auditor on the financial information of the component.
89
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:
A. Be accompanied by the original auditor's report on the prior period.
B. Bear the same date as the original auditor's report on the prior period.
C. Express an unmodified opinion concerning the restated financial statements.
D. Qualify the opinion concerning the restated financial statements because of a change in accounting principle.
C. Express an unmodified opinion concerning the restated financial statements.
90
Before a predecessor auditor reissues the prior year’s audit report on the financial statements of a former client for inclusion with the successor auditor’s report on comparative financial statements, the predecessor does all of the following except:
A. Compare the current period comparative financial statements with those of the prior year.
B. Review the audit documentation of the successor auditor.
C. Obtain the current comparative financial statements.
D. Obtain a successor auditor representation letter.
B. Review the audit documentation of the successor auditor.
91
An auditor expressed a qualified opinion on the prior year's financial statements because of a lack of adequate disclosure. These financial statements are properly restated in the current year and presented in comparative form with the current year's financial statements. The auditor's updated report on the prior year's financial statements should:
A. Continue to express a qualified opinion on the prior year's financial statements.
B. Make no reference to the type of opinion expressed on the prior year's financial statements.
C. Be accompanied by the auditor's original report on the prior year's financial statements.
D. Express an unmodified opinion on the restated financial statements of the prior year.
D. Express an unmodified opinion on the restated financial statements of the prior year.
92
Before reissuing the prior year's auditor's report on the financial statements of a former client, the predecessor auditor should obtain letters of representation from the:
A. Former client's attorney and management.
B. Former client's board of directors and the successor auditor.
C. Former client's management and the board of directors.
D. Successor auditor and the former client's management.
D. Successor auditor and the former client's management.
93
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. Express an opinion only on the current year's financial statements and make no reference to the prior year's statements.
C. Issue an updated comparative audit report indicating the division of responsibility.
D. Indicate the substantive reasons for the qualification in the predecessor auditor's opinion.
D. Indicate the substantive reasons for the qualification in the predecessor auditor's opinion.
94
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. Issues an unmodified opinion on the consolidated financial statements.
D. Is satisfied as to the independence and professional reputation of the component auditor.
D. Is satisfied as to the independence and professional reputation of the component auditor.
95
If a component auditor does not meet the independence requirements that are relevant to a group audit of a nonissuer's financial statements, then the group engagement team should first:
A. Disclose the lack of independence to the nonissuer's management and consider revising the audit report.
B. Withdraw from the engagement when permissible under law or regulation.
C. Communicate the lack of independence to the appropriate regulatory authority.
D. Attempt to obtain sufficient appropriate audit evidence relating to the financial information of the component without making reference to or using the work of the component auditor.
D. Attempt to obtain sufficient appropriate audit evidence relating to the financial information of the component without making reference to or using the work of the component auditor.
96
Under U.S. GAAS, in which of the following situations would a group engagement partner least likely make reference to component auditor who audited a subsidiary of the entity?
A. The group engagement partner finds it impractical to review the component auditor's work or otherwise be satisfied as to the component auditor's work.
B. The financial statements audited by the component auditor are material to the consolidated financial statements covered by the group engagement partner's opinion.
C. The component auditor was retained by the group engagement partner and the work was performed under the group engagement partner's guidance and control.
D. The group engagement partner is unable to be satisfied as to the independence and professional reputation of the component auditor.
C. The component auditor was retained by the group engagement partner and the work was performed under the group engagement partner's guidance and control.
97
A group engagement partner decides not to refer to the audit of a component auditor. After making inquiries about the component auditor's professional reputation and independence, the group engagement partner most likely would:
A. Obtain written permission from the component auditor to omit the reference in the group engagement auditor's report.
B. Contact the component auditor and review the audit programs and working papers pertaining to the component.
C. Document in the engagement letter that the group engagement partner assumes no responsibility for the other CPA's work.
D. Add an emphasis-of-matter paragraph to the auditor's report indicating that the component's financial statements are not material to the consolidated financial statements.
B. Contact the component auditor and review the audit programs and working papers pertaining to the component.
98
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.
A. Divide responsibility.
99
Foley, CPA, is the group engagement partner for a multinational corporation. Pente, CPA, audits a wholly owned subsidiary of this corporation. Which of the following is true about Foley's decision between assumption and division of responsibility under U.S. GAAS?
A. If Foley chooses to assume responsibility, the report will mention this assumption in the auditor's responsibility paragraph.
B. If Foley chooses to divide responsibility, she need not evaluate Pente's reputation and independence.
C. If Foley chooses to divide responsibility, no reference to the work done by Pente will be included in the audit report.
D. If Foley chooses to assume responsibility, she must not make reference to the component auditor in her report.
D. If Foley chooses to assume responsibility, she must not make reference to the component auditor in her report.
100
In the audit of a nonissuer, what is an auditor's responsibility for supplementary information, such as the disclosure of pension information, which is outside the basic financial statements but required by the GASB?
A. The auditor should apply substantive tests of transactions to the supplementary information and verify its conformity with the GASB requirement.
B. The auditor's only responsibility for the supplementary information is to determine that such information has not been omitted.
C. The auditor should apply certain limited procedures to the supplementary information and add a separate section to the auditor's report.
D. The auditor has no responsibility for such supplementary information as long as it is outside the basic financial statements.
C. The auditor should apply certain limited procedures to the supplementary information and add a separate section to the auditor's report.
101
When audited financial statements are presented in a client's document containing other information, the auditor should:
A. Perform inquiry and analytical procedures to ascertain whether the other information is reasonable.
B. Perform the appropriate substantive auditing procedures to corroborate the other information.
C. Add an other-matter paragraph to the auditor' s report without changing the opinion on the financial statements.
D. Read the other information to determine that it is consistent with the audited financial statements.
D. Read the other information to determine that it is consistent with the audited financial statements.
102
In its annual report to shareholders, Lake Co. included a separate management report that contained additional information. Lake's auditor is expressing an unmodified opinion on Lake's financial statements but has not been engaged to examine and report on this additional information. What is the auditor's responsibility concerning such a report?
A. The auditor should add an other-matter paragraph to the report on the financial statements disclaiming an opinion on the additional information.
B. The auditor should request Lake to place the management report in its annual report where it will not be misinterpreted to be the auditor's assertion.
C. The auditor has no obligation to read the management report or to verify the accuracy or appropriateness of its contents.
D. The auditor should read the management report and consider whether it contains a material misstatement of fact.
A. The auditor should add an other-matter paragraph to the report on the financial statements disclaiming an opinion on the additional information.
103
An auditor reads the letter of transmittal accompanying a county's comprehensive annual financial report and identifies a material inconsistency with the financial statements. The auditor determines that the financial statements do not require revision. Which of the following actions should the auditor take?
A. Request that the client revise the letter of transmittal.
B. Consider withdrawing from the engagement.
C. Include an other-matter paragraph in the auditor's report.
D. Request a client representation letter acknowledging the inconsistency.
A. Request that the client revise the letter of transmittal.
104
An auditor concludes that there is a material inconsistency in the other information in an annual report to shareholders containing audited financial statements. The auditor believes that the financial statements do not require revision, but the client is unwilling to revise or eliminate the material inconsistency in the other information. Under these circumstances, what action would the auditor most likely take next?
A. Consider the situation closed because the other information is not in the audited financial statements.
B. Disclaim an opinion on the financial statements after explaining the material inconsistency in a other-matter paragraph.
C. Issue an "except for" qualified opinion after discussing the matter with the client's audit committee.
D. Communicate this matter with those charged with governance
D. Communicate this matter with those charged with governance
105
An auditor is engaged to report on selected financial data that are included in a client-prepared document containing audited financial statements. Under these circumstances, the report on the selected data should:
A. State that the presentation is prepared in accordance with a special purpose framework.
B. Be limited to data derived from the entity's audited financial statements.
C. Restrict the use of the report to those specified users within the entity.
D. Indicate that the data are subject to prospective results that may not be achieved.
A. State that the presentation is prepared in accordance with a special purpose framework.
106
For a nonissuer, which of the following procedures would an auditor most appropriately perform to provide an opinion on whether supplementary information presented with financial statements is fairly stated in relation to the financial statements?
A. Evaluate the appropriateness, but not the completeness, of the supplementary information.
B. Obtain verbal representations from management stating that it acknowledges its responsibility for the presentation of the supplementary information.
C. Obtain verbal representations from management about any significant assumptions or interpretations underlying the measurement of the supplementary information.
D. Inquire of management about the purpose of the supplementary information and the criteria used by management to prepare the information.
D. Inquire of management about the purpose of the supplementary information and the criteria used by management to prepare the information.
107
An auditor is engaged to report on supplemental information that accompanies audited financial statements. The auditor’s report on supplemental information should include:
A. A statement that the supplemental information is the responsibility of the auditor.
B. A separate paragraph at the end of the report restricting its use to specified parties.
C. A statement that the supplemental information has been subjected to audit procedures performed in conjunction with the audit of the financial statements.
D. A statement that any difference in the facts, circumstances, or assumptions may change the report.
C. A statement that the supplemental information has been subjected to audit procedures performed in conjunction with the audit of the financial statements.
108
If information accompanying the basic financial statements has been subjected to auditing procedures, the auditor may include in the auditor's report on the financial statements an opinion that the accompanying information is fairly stated in:
A. Accordance with generally accepted auditing standards.
B. All material respects in relation to the financial statements as a whole.
C. Conformity with generally accepted accounting principles.
D. Accordance with attestation standards expressing a conclusion about management's assertions.
B. All material respects in relation to the financial statements as a whole.
109
An auditor is engaged to perform audit procedures and report on supplemental information that accompanies the financial statements pursuant to PCAOB standards. If the auditor is unable to obtain sufficient appropriate audit evidence to support an opinion on the supplemental information, the auditor should issue an opinion on the supplementary information that is a(n):
A. Adverse or disclaimer of opinion.
B. Adverse opinion.
C. Qualified opinion.
D. Disclaimer of opinion.
D. Disclaimer of opinion.
110
An annual shareholders' report includes audited financial statements and contains supplementary information required by GAAP. Is it permissible for the auditor to report on such information?
A. No, because such reporting may lead to the belief that the auditor is responsible for the information.
B. Yes, provided the report provides negative assurance only.
C. No, because the auditor has no responsibility to read the other information in a document containing audited financial statements.
D. Yes, provided the auditor performs sufficient audit procedures to determine whether the information is fairly stated, in all material respects, in relation to the financial statements.
D. Yes, provided the auditor performs sufficient audit procedures to determine whether the information is fairly stated, in all material respects, in relation to the financial statements.
111
What is an auditor's responsibility for supplementary information which is outside the basic financial statements, but required by the FASB?
A. The auditor has no responsibility for required supplementary information as long as it is outside the basic financial statements.
B. The auditor should apply certain limited procedures to the required supplementary information, and add a separate section to the financial statement audit report.
C. The auditor's only responsibility for required supplementary information is to determine that such information has not been omitted.
D. The auditor should apply tests of details of transactions and balances to the required supplementary information, and report any material misstatements in such information.
B. The auditor should apply certain limited procedures to the required supplementary information, and add a separate section to the financial statement audit report.
112
When auditing a nonissuer, what is an auditor's responsibility for supplementary information, such as disclosure of pension information, which is outside the basic financial statements but required by GAAP?
A. The auditor should engage a specialist, such as an actuary, to verify that management's assertions are reasonable.
B. The auditor should perform tests of transactions to the supplementary information to verify that it is reasonably comparable to the prior year's information.
C. The auditor's only responsibility for supplementary information is to determine that such information has not been omitted.
D. The auditor should apply certain limited procedures to the supplementary information.
D. The auditor should apply certain limited procedures to the supplementary information.
113
Which of the following should the auditor of a nonissuer do when reporting on supplementary information that is required by a designated accounting standard setter, presented with the basic financial statements?
A. Include an emphasis-of-matter paragraph that references the required supplementary information.
B. Include a reference to the required supplementary information in the opinion paragraph.
C. Include a separate report section that references the required supplementary information.
D. Make no reference to the required supplementary information in the report.
C. Include a separate report section that references the required supplementary information.
114
When financial statements include supplementary information which is outside the basic financial statements, but required by GAAP, the auditor may choose any of the following options, except:
A. Express an opinion on the information, if he or she has been engaged to examine such information.
B. Report on whether the information is fairly stated in relation to the financial statements taken as a whole, if appropriate procedures have been applied.
C. Express negative assurance on the information, if review procedures have been appropriately performed.
D. Disclaim an opinion on the information.
C. Express negative assurance on the information, if review procedures have been appropriately performed.
115
The quarterly data required by SEC Regulation S-K have been omitted. Which of the following statements must be included in the auditor's report?
A. The auditor was unable to review the data.
B. The company has not presented the selected quarterly financial data.
C. The company's internal control provides an adequate basis to complete the review.
D. The auditor will review the selected data during the review of the subsequent quarterly financial data.
B. The company has not presented the selected quarterly financial data.
116
An auditor's report on financial statements prepared on the cash receipts and disbursements basis of accounting should include all of the following, except:
A. A statement that the auditor is responsible for determining that the cash receipts and disbursements basis of accounting is an acceptable basis for the preparation of the financial statements.
B. A statement that the audit was conducted in accordance with auditing standards generally accepted in the United States of America.
C. An opinion as to whether the financial statements are presented fairly in conformity with the cash receipts and disbursements basis of accounting.
D. A reference to the note to the financial statements that describes the cash receipts and disbursements basis of accounting.
A. A statement that the auditor is responsible for determining that the cash receipts and disbursements basis of accounting is an acceptable basis for the preparation of the financial statements.
117
Which of the following is not considered a special purpose framework?
A. Tax basis
B. International Financial Reporting Standards
C. Contractual basis
D. Cash basis
B. International Financial Reporting Standards
118
Which of the following is not a special purpose framework?
A. Basis of accounting used by an entity to file its income tax return.
B. Basis of accounting promulgated by the International Accounting Standards Board.
C. Basis of accounting used by an entity to comply with the financial reporting requirements of a government regulatory agency.
D. Cash receipts and disbursements basis of accounting.
B. Basis of accounting promulgated by the International Accounting Standards Board.
119
Reports on special purpose frameworks are issued in conjunction with:
A. Feasibility studies presented to illustrate an entity's results of operations.
B. Pro forma financial presentations designed to demonstrate the effects of hypothetical transactions.
C. Compliance with reporting requirements to be filed with a specific regulatory agency.
D. Interim financial information reviewed to determine whether material modifications should be made to conform with GAAP.
C. Compliance with reporting requirements to be filed with a specific regulatory agency.
120
When a CPA reports on audited financial statements prepared on the cash receipts and disbursements basis of accounting, the report should:
A. Refer to the note in the financial statements that describes management's responsibility for the financial statements.
B. Include a separate emphasis-of-matter paragraph that discusses the justification for, and the CPA's concurrence with, the departure from GAAP.
C. State that the basis of presentation is a comprehensive basis of accounting (OCBOA) other than GAAP.
D. Explain why this basis of accounting is more useful for the readers of this entity's financial statements than GAAP.
C. State that the basis of presentation is a comprehensive basis of accounting (OCBOA) other than GAAP.
121
Helpful Co., a not-for-profit entity, prepared its financial statements on an accounting basis prescribed by a regulatory agency solely for filing with that agency. Green audited the financial statements in accordance with generally accepted auditing standards and concluded that the financial statements were fairly presented on the prescribed basis. Green should issue a(n):
A. Adverse opinion.
B. Single unmodified opinion on the special purpose financial statements.
C. Disclaimer of opinion.
D. Qualified opinion.
B. Single unmodified opinion on the special purpose financial statements.
122
An auditor's report on financial statements prepared in accordance with an other comprehensive basis of accounting should include all of the following, except:
A. An opinion as to whether the financial statements are presented fairly in conformity with the other comprehensive basis of accounting.
B. A statement that the basis of presentation is a comprehensive basis of accounting other than generally accepted accounting principles.
C. Reference to the note to the financial statements that describes the basis of presentation.
D. An opinion as to whether the basis of accounting used is appropriate under the circumstances.
D. An opinion as to whether the basis of accounting used is appropriate under the circumstances.
123
An auditor's special report on financial statements prepared in conformity with the cash basis of accounting should include an emphasis-of-matter paragraph that:
A. States whether the financial statements are fairly presented in conformity with another comprehensive basis of accounting.
B. Explains how the results of operations differ from financial statements prepared in conformity with generally accepted accounting principles.
C. Refers to the note to the financial statements that describes the basis of accounting.
D. Justifies the reasons for departing from generally accepted accounting principles.
C. Refers to the note to the financial statements that describes the basis of accounting.
124
When reporting on financial statements prepared on the same basis of accounting used for income tax purposes, the auditor should include in the report a paragraph that:
A. Justifies the use of the income tax basis of accounting.
B. Refers to the authoritative pronouncements that explain the income tax basis of accounting being used.
C. Emphasizes that the financial statements are not intended to have been audited in accordance with generally accepted auditing standards.
D. States that the income tax basis of accounting is a basis of accounting other than generally accepted accounting principles.
D. States that the income tax basis of accounting is a basis of accounting other than generally accepted accounting principles.
125
Delta Life Insurance Co. prepares its financial statements on an accounting basis insurance companies use pursuant to the rules of a state insurance commission. If Wall, CPA, Delta's auditor, discovers that the statements are not suitably titled, Wall should:
A. Apply to the state insurance commission for an advisory opinion.
B. Explain in the notes to the financial statements the terminology used.
C. Issue a special statutory basis report that clearly disclaims any opinion.
D. Disclose any reservations in a basis for modification paragraph and qualify the opinion.
D. Disclose any reservations in a basis for modification paragraph and qualify the opinion.
126
Which of the following titles would be considered suitable for financial statements that are prepared on a cash basis?
A. Statement of operations.
B. Statement of cash flows.
C. Statement of revenues collected and expenses paid.
D. Income statement.
C. Statement of revenues collected and expenses paid.
127
Which of the following would be an appropriate title for a statement of revenue and expenses prepared using an other comprehensive basis of accounting (OCBOA)?
A. Statement of income-regulatory basis.
B. Statement of activities.
C. Income statement.
D. Statement of operations.
A. Statement of income-regulatory basis.
128
Which of the following items should be included in an auditor’s report for financial statements prepared in conformity with the cash basis of accounting?
A. An emphasis-of-matter paragraph alerting readers about the preparation in accordance with the cash basis of accounting.
B. A sentence stating that the audit was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants.
C. An other-matter paragraph restricting the use of the auditor’s report.
D. Description of the purpose for which the financial statements are prepared included within the management’s responsibility paragraph.
A. An emphasis-of-matter paragraph alerting readers about the preparation in accordance with the cash basis of accounting.
129
When an auditor reports on financial statements prepared on an entity's income tax basis, the auditor's report should:
A. Not express an opinion on whether the statements are presented in conformity with the comprehensive basis of accounting used.
B. State that the basis of presentation is a basis of accounting other than GAAP.
C. Include an explanation of how the results of operations differ from the cash receipts and disbursements basis of accounting.
D. Disclaim an opinion on whether the statements were examined in accordance with generally accepted auditing standards.
B. State that the basis of presentation is a basis of accounting other than GAAP.
130
An entity prepares its financial statements on its income tax basis. A description of how that basis differs from GAAP should be included in the:
A. Auditor's engagement letter.
B. Emphasis-of-matter paragraph of the auditor's report.
C. Management representation letter.
D. Notes to the financial statements.
D. Notes to the financial statements.
