Audit Section 4

Question 1

A client’s fixed asset experienced a significant impairment loss but the client refuses to record the impairment loss in the financial statements.

Answer 1

This is a material departure from GAAP that is neither necessary nor justified by the client. When a misstatement is material but not pervasive, the auditor should issue a qualified opinion.

Question 2

Refrigerators Inc. changed its estimate for warranty expense from $110 per refrigerator sold in the prior year to $150 per refrigerator sold. This change is properly accounted for and disclosed in the financial statements. The auditor of Refrigerators Inc.
should issue a

Answer 2

The auditor should express an unmodified opinion as the financial statements are fairly stated. A change in warranty expense “estimate” is a change in estimate. Changes in estimate do not require an emphasis-of-matter paragraph.

Question 3

Under U.S. auditing standards, the auditor expresses an opinion on the financial statements’ conformity with GAAP in the Opinion section and the Management’s Responsibility section that the management is responsible for

Answer 3

the preparation and fair presentation of the financial statements in accordance with GAAP.

Question 4

An auditor reporting on the audit of financial statements of an issuer should indicate in the Basis for Opinion section that the engagement was conducted in accordance with

Answer 4

PCAOB standards, and should refer to GAAP in the Opinion on the Financial Statements section.

Question 5

The auditor’s responsibility paragraph of the unmodified opinion audit report explicitly states that an audit includes

Answer 5

identifying and assessing the risks of material misstatement and designing and performing audit procedures responsive to those risks.

Question 6

When circumstances indicate that a financial presentation in accordance with U.S. GAAP would be misleading, a departure from U.S. GAAP is

Answer 6

permissible. In such cases, the auditor should issue an unmodified opinion because the financial statements are not materially misstated.

Question 7

Is a basic element of the auditor’s report under U.S. auditing standards

Answer 7

An audit includes evaluating the reasonableness of significant accounting estimates made by management.

Question 8

“Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.” The statement is

Answer 8

Consistent is implicit in the auditor’s report, and will be explicitly mentioned in an emphasis-of-a-matter paragraph only if there are issues with consistency.

Question 9

An auditor’s responsibility to express an opinion on the financial statements of a nonissuer under U.S. auditing standards is

Answer 9

Explicitly represented in the Auditor’s Responsibility paragraph.

Question 10

The auditor obtained sufficient appropriate audit evidence and concludes that misstatements are both material and pervasive to the financial statements.

Answer 10

best describes when an auditor should express an adverse opinion

Question 11

The opinion paragraph in an adverse opinion should state that

Answer 11

in the auditor’s opinion, because of the significance of the matters) discussed in the Basis for Adverse Opinion section, the accompanying consolidated financial statements do not present fairly…

Question 12

An adverse opinion is issued when the financial statements are

Answer 12

not presented in accordance with GAAP.

Question 13

The auditor would explain to the client that in order for the entity’s financial statements to be in conformity with GAAP, there must be

Answer 13

adequate disclosures of all material matters including all financial statements and the supporting footnotes. As a result, the auditor would tell Zag that without adequate disclosure of the entity’s cash flows, the audit report would have to be issued with a qualified or adverse audit opinion.

Question 14

Inadequate disclosure of a material related party transaction would result in a

Answer 14

qualified or adverse opinion.

Question 15

“In our opinion, because of the significance of the matter discussed in the Basis for Adverse Opinion section of our report, the accompanying consolidated financial statements do not present fairly the financial position…” is an example of

Answer 15

An adverse opinion

Question 16

The auditor should disclose the substantive reasons for expressing an

Answer 16

adverse opinion in a separate Basis for Adverse Opinion section following the Opinion section.

Question 17

If management does not provide reasonable justification for a change in accounting principles

Answer 17

the auditor would issue a qualified or adverse opinion, depending on materiality.

Question 18

An auditor may express a qualified or disclaimer of opinion when

Answer 18

due to a scope limitation, the auditor is unable to perform all the tests necessary to complete an audit. Management’s refusal to permit inquiry of the attorneys generally will result in a disclaimer of opinion or withdrawal from the audit.

Question 19

If a company issues financial statements that purport to present financial position and results of operations but omits the related statement of cash flows, the auditor will normally conclude that the omission requires

Answer 19

qualification of the opinion. Which is an auditor’s opinion that the financials are fairly presented, with the exception of a specified area.

Question 20

Inadequate disclosure of material information is a departure from GAAP and may result in either a

Answer 20

qualified or adverse opinion, depending on materiality.

Question 21

The failure of the financial statements to contain adequate disclosure of related party transactions, or other required disclosures, would result in a

Answer 21

qualified or adverse opinion, not a disclaimer of opinion.

Question 22

When a qualified opinion results from an inability to obtain sufficient appropriate audit evidence, the situation should be described in a

Answer 22

Basis for Qualified Opinion section following the Qualified Opinion section and should be referred to in the Qualified Opinion section. The scope limitation is not mentioned in the Management’s Responsibility paragraph.

Question 23

Client-imposed restrictions of scope such as those caused by inadequate records would cause the auditor

Answer 23

to choose between issuing a disclaimer of opinion and a qualified opinion.

Question 24

Since the CPA could not determine whether the suspected illegal bribes were material to the financial statements, or whether senior management was involved in the scheme, Morris should

Answer 24

disclaim an opinion on the financial statements.

Question 24

When an auditor qualifies his opinion because of a scope limitation, the wording in the opinion paragraph should indicate that

Answer 24

the qualification pertains to the possible effects on the financial statements and not to the scope limitation itself.

Question 25

1) A disclaimer of opinion means that the auditor was 2) An unjustified change in accounting principle could result in a

Answer 25

1) unable to obtain sufficient appropriate audit evidence to provide a reasonable basis for an opinion, thus, no opinion is expressed.
2) material misstatement of the financial statements that would result in a qualified or adverse opinion, not a disclaimer of opinion.

Question 26

Refusal of the client’s attorney to respond to inquiry is an example of

Answer 26

a scope limitation. The auditor must consider the impact of the scope limitation on the audit opinion to be issued.

Question 27

Due to the significance of the inventory balance, the effects of undetected misstatements could be both

Answer 27

material and pervasive. In this situation, U.S. GAAS allows the auditor to consider whether to withdraw or disclaim an opinion on the financial statements.

Question 28

Restrictions on the scope of the audit, such as the

Answer 28

timing of the work, the inability to obtain sufficient appropriate audit evidence, or an inadequacy in the accounting records, may require the auditor to qualify or disclaim an opinion. Inability to obtain audited financial statements supporting the entity’s investment in a foreign subsidiary is such a restriction on the scope of the audit.

Question 29

An auditor may issue a qualified opinion (or a disclaimer, depending on materiality) when

Answer 29

there is a lack of sufficient appropriate audit evidence, or when there are restrictions on the scope of the audit.

Question 30

When an auditor is not independent with respect to an entity, only a

Answer 30

disclaimer of opinion may be issued.

Question 31

Management’s refusal to furnish written representations is a significant client imposed restriction on

Answer 31

the scope of an audit, ordinarily warranting a disclaimer of opinion.

Question 32

The refusal of a client’s attorney to respond to an audit inquiry letter is an example of

Answer 32

a scope limitation. The auditor must use professional judgment in determining whether that scope limitation warrants a qualified opinion or a disclaimer of opinion.

Question 33

If a contingent liability is probable, but not estimable, and it is disclosed in the footnotes, the auditor should

Answer 33

issue an unmodified opinion.

Question 34

An auditor would add an other-matter paragraph when

Answer 34

current period financial statements are audited and presented in comparative form with compiled or reviewed financial statements from the prior period or in comparative form with prior period financial statements that were not audited, reviewed, or compiled.

Question 35

An unjustified accounting change may cause the auditor to issue a

Answer 35

qualified or adverse opinion. A material weakness must be reported to management and those charged with governance, but would not be disclosed in an emphasis-of-matter paragraph added to an otherwise unmodified opinion.

Question 36

The auditor’s standard report implies that the auditor is satisfied that the

Answer 36

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 37

The title and sentences represent an emphasis-of-matter paragraph. An emphasis-of-matter paragraph is required when the

Answer 37

financial statements are prepared in accordance with an applicable special purpose framework, such as the cash basis of accounting. Note that an emphasis of matter paragraph may use the heading of “Emphasis of Matter” or any other appropriate heading.

Question 38

Following is an example of an appropriate emphasis-of-matter paragraph: “As discussed in Note X to the financial statements, the company changed its method of accounting for income taxes in X2.”

Answer 38

The paragraph should refer to the note in the financial statements that discusses the change in detail.

Question 39

An emphasis-of-matter paragraph is required to describe a

Answer 39

justified change in accounting principle that is material to the financial statements.

Question 40

A change in accounting estimate (such as a change in the useful life of a depreciable asset) is accounted for

Answer 40

prospectively and does not affect the comparability of financial statements between periods. Because the auditor’s unmodified opinion implies that consistency exists, no modification to the report is necessary.

Question 41

A justified lack of consistency caused by a material change in GAAP between periods would be reported in

Answer 41

an emphasis-of-matter paragraph. Under these circumstances, the auditor issues an unmodified opinion.

Question 42

An other-matter paragraph refers to matters other than those

Answer 42

presented or disclosed in the financial statements that are relevant to the users’ understanding. If the auditor has been engaged to report on more than one set of financial statements that have been prepared in accordance with different report frameworks, the other-matter paragraph may be necessary.

Question 43

Details concerning the results of audit procedures (such as the results of confirmation of receivables) generally

Answer 43

do not appear in the footnotes.

Question 44

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 attempt to

Answer 44

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.

Question 44

“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 X Company, is based solely on the report of the other auditors.”

Answer 44

Such a statement is included in the Opinion section of the auditor’s report.

Question 45

When the group engagement auditor accepts responsibility for the work performed by a component auditor, the group engagement partner must contact

Answer 45

the component auditor and review the audit program and working papers pertaining to the component.

Question 46

Under U.S. GAAS, if, among other requirements, the group engagement partner is satisfied as to the

Answer 46

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 47

When the group auditor decides not to make reference to the audit of a component auditor, the group auditor assumes responsibility for the

Answer 47

work of the component auditor and should determine the type of work to be performed on the financial information of the component. If the component is significant, the component should be audited by the group engagement team or the component auditor.2

Question 48

If the auditor discovers a material inconsistency in other information accompanying the audited financial statements, the financial statements do not require revision, and the client refuses to eliminate or revise the inconsistency, the auditor should communicate the matter with those charged with governance and then consider

Answer 48

1) revising the report to include a separate “Other Information” section describing the material inconsistency,

2) withholding the use of the report, or

3) withdrawing from the engagement and consulting with legal counsel.

Question 49

If the quarterly data required by SEC Regulation S-K have been omitted, the auditor’s report must include a

Answer 49

statement indicating that the company has not presented such data.

Question 50

The auditor should read the “other information” in a client’s document containing audited financial statements to

Answer 50

determine that it is consistent with the audited financial statements.

Question 51

The auditor would not perform a review or express negative assurance on

Answer 51

supplementary information required by GAAP.

Question 52

The auditor should perform limited procedures on required

Answer 52

supplementary information accompanying the financial statements. In addition, the auditor’s report on the financial statements should include a separate section with the heading, “Supplementary Information.”

Question 53

The audit report for nonissuers should include a

Answer 53

separate section with the heading “Required Supplementary Information” when reporting on required supplementary information that is presented with the basic financial statements.

Question 54

The auditor should inquire of management regarding

Answer 54

the purpose of the supplementary information and the criteria used to prepare the information. This is done in addition to the procedures performed during the audit of the financial statements.

Question 55

For additional supplementary information required by the FASB, the auditor should apply certain

Answer 55

limited procedures to the information and add a separate section with the heading “Required Supplementary Information” to the financial statement audit report.

Question 56

If the auditor is unable to obtain sufficient appropriate audit evidence to support an opinion on the supplemental information, the auditor should

Answer 56

disclaim an opinion on the supplemental information. In those situations, the auditor’s report on the supplemental information should describe the reason for the disclaimer and state that the auditor is unable to and does not express an opinion on the supplemental information.

Question 57

A report on other comprehensive basis of accounting (“OCBOA”) financial statements should include an

Answer 57

emphasis-of-matter paragraph stating the basis, referring to the footnote that describes it, and indicating that it is a non-
GAAP basis.

Question 57

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

Answer 57

All material respects in relation to the financial statements as a whole.

Question 58

When reporting on financial statements prepared in conformity with a basis of accounting other than GAAP, the auditor should include an

Answer 58

emphasis-of-matter paragraph that states that the special purpose framework is a basis of accounting other than GAAP.

Question 59

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

Answer 59

paragraph that states that the income tax basis of accounting is a basis of accounting other than GAAP. Examples of an appropriate title for this paragraph are “Emphasis of Matter” or “Basis of Accounting.”

Question 60

Other comprehensive basis of accounting financial statements include financial statements prepared in accordance with a

Answer 60

regulatory basis of accounting. An income statement prepared in accordance with a regulatory basis of accounting could be entitled “Statement of income-regulatory basis.”

Question 61

Non-GAAP statements should be suitably titled. For example, instead of an income statement, an appropriate cash basis financial statement title might be

Answer 61

“statement of revenues collected and expenses paid.”

Question 62

IFRS (the standards promulgated by the International Accounting Standards Board) and GAAP (the standards promulgated by the Financial Accounting Standards Board) are general purpose frameworks. Special purpose frameworks include:

Answer 62

1. Cash basis and modified cash basis
2. Tax basis
3. Regulatory basis
4. Contractual basis
5. Other basis

Question 63

A description of how the income tax basis differs from GAAP should be included in the

Answer 63

notes to the financial statements.

Question 64

The auditor would not indicate in his/her report an opinion as to whether the

Answer 64

method of accounting used is appropriate.

Question 65

Financial statements prepared in accordance with a comprehensive basis of accounting other than GAAP that are not suitably titled require a

Answer 65

qualified opinion with a basis for modification paragraph.

Question 66

PCAOB standards surrounding internal control apply only to

Answer 66

audits of issuers.

Question 67

In an audit of an issuer, the auditor must provide an opinion on

Answer 67

1) Financial Statements
2) The effectiveness of internal control

Question 68

Under the Sarbanes-Oxley Act, the chief executive officer is required to

Answer 68

certify (or sign off) on all the other items, but is not required to certify the financial expertise of the audit committee. The expected financial expertise of the audit committee is typically verified by the entity’s board.

Question 69

In order for an auditor to audit and report on a nonissuer’s internal control, management must

Answer 69

present its written assessment about the effectiveness of internal control.

Question 70

If a service auditor is unable to obtain a written assertion from the service organization’s management regarding its system and the suitability of the design and operating effectiveness of controls, it would be most appropriate for the auditor to

Answer 70

withdraw from the engagement unless prohibited by law.

Question 71

When planning an audit of the effectiveness of the entity’s internal control in an integrated audit of a nonissuer, a practitioner would be least likely to

Answer 71

consider the evaluation of the operating effectiveness of the controls. The evaluation of the operating effectiveness of controls occurs after the planning stage.

Question 72

The auditor’s conclusion on the operating effectiveness of a given control is not a role of

Answer 72

the risk assessment process. The auditor’s conclusion on the operating effectiveness of internal control occurs after the risk assessment process.

Question 73

1) Entity level controls include
2) Controls regarding the company’s annual stockholder meeting are controls related to

Answer 73

1) controls related to the control environment, the risk assessment process, and the policies over risk management practices.
2) a specific event, rather than the entity as a whole.

Question 74

Controls over the completeness of deposited cash relates to controls

Answer 74

at the account level.

Question 75

An auditor that is testing controls at a company with multiple business units should test controls over

Answer 75

specific risks at business units that are material to the company’s consolidated financial statements.

Question 76

In an audit of an issuer, the auditor is required to communicate both

Answer 76

significant deficiencies and material weaknesses to management and the audit committee, but only material weaknesses result in an adverse opinion on the effectiveness of internal control.

Question 77

The auditor is required to communicate all

Answer 77

deficiencies in internal control to management, and deficiencies that constitute a significant deficiency or a material weakness to management and the audit committee.

Question 78

The auditor is not required to communicate all

Answer 78

control deficiencies to those charged in governance.
However, control deficiencies that are determined to be significant deficiencies and material weaknesses are required to be communicated to those charged with governance.

Question 79

A scope limitation requires the auditor to

Answer 79

disclaim an opinion or withdraw from the engagement, and a material weakness in internal control requires the auditor to issue an adverse opinion. Neither situation would result in a qualified opinion.

Question 80

Negative assurance may be expressed when an accountant is requested

Answer 80

to report on the results of performing a review of management’s assertion.

Question 81

Management of Eva Industries, an issuer as defined under the Sarbanes-Oxley Act, believes it has eliminated a material weakness previously noted in its assessment of internal control, and has hired Henna and Company, CPAs, to attest to the improvements in internal control.

Answer 81

Eva’s management must provide a written report to accompany Henna and Company’s report.

Question 82

A CPA should refer to Statements on Standards for Attestation Engagements (SSAE) for a

Answer 82

review of pro forma financial information.

Question 83

The consistency assertion in an MD&A presentation addresses whether

Answer 83

nonfinancial data has been accurately derived from related records.

Question 84

A CPA is required to comply with the provisions of Statements on Standards for Attestation Engagements (SSAE) when

Answer 84

engaged to provide assurance on investment performance statistics prepared by an investment company on established criteria. SSAE provide guidance on engagements other than reporting on historical financial statements.

Question 85

The practitioner should refer to Statements on Standards for Attestation Engagements for an attestation engagement. In an attest service, the practitioner is engaged to issue

Answer 85

a report on subject matter or on an assertion about the subject matter (in this case, the square footage of the warehouse), that is the responsibility of a party other than the practitioner (in this case, management).

Question 86

Attest engagements covered under Statements on Standards for Attestation Engagements (SSAE) specifically exclude services performed

Answer 86

in accordance with Statements on Standards for Accounting and Review Services (SSARS). Since a review of a nonpublic company’s financial statements is conducted under SSARS, it is not subject to attestation standards.

Question 87

There is no requirement that the accountant’s report be restricted to

Answer 87

specified parties when reporting on an assertion about the subject matter instead of reporting directly on the subject matter.

Question 88

A report on agreed-upon procedures should include

Answer 88

a list of the procedures performed (or reference thereto) and the related findings.

Question 89

1) Financial projections are

2) Financial projections are

Answer 89

1) hypothetical, “what if” prospective financial statements. Because the user may need to ask the responsible party questions about the underlying assumptions

2) “restricted use” reports, whose use is restricted to the responsible party and those third parties with whom the responsible party is negotiating directly.

Question 90

When a CPA examines projected financial statements, the standard report should include

Answer 90

a statement that the examination “… included such procedures as we considered necessary to evaluate both the assumptions used by management and the preparation and presentation of the projection.”

Question 91

Prior to the issuance of the practitioner’s report, the engaging party (normally the client) must acknowledge and agree that

Answer 91

the procedures performed were appropriate to meet the intended purpose of the engagement.

Question 92

A report on agreed-upon procedures should include a

Answer 92

disclaimer of responsibility for the sufficiency of the procedures.

Question 93

A practitioner’s report on agreed-upon procedures that is in the form of procedures and findings should contain a statement that the

Answer 93

subject matter is the responsibility of the responsible party.

Question 94

Mill’s report on these agreed-upon procedures should include a

Answer 94

description of the procedures performed and Mill’s findings.

Question 94

It is appropriate to include a description of the

Answer 94

1) procedures performed
2) related findings
3) materiality thresholds in the practitioner’s report in an agreed-upon procedures engagement.

Question 95

A practitioner should include

Answer 95

all findings from the application of the agreed-upon procedures in an agreed-upon procedures report.

Question 96

financial statements is(are) appropriate for general use

Answer 96

A financial forecast is appropriate for general use, but a financial projection is not.

Question 97

Any type of prospective financial statements (financial forecasts and financial projections) would normally be

Answer 97

appropriate for limited use.

Question 98

An accountant performing an engagement to compile prospective financial statements should make

Answer 98

inquiries about the accounting principles used in the preparation of the prospective financial statements.

Question 99

Accepting an engagement to compile a financial projection for a nonissuer most likely would be

Answer 99

inappropriate if the projection were to be distributed to all stockholders of record as of the report date (general use). Only a financial forecast is suitable for general use.

Question 100

Financial projections are appropriate only for

Answer 100

limited use. Limited use means that the financial statements will only be used by the responsible party alone or by parties negotiating directly with the responsible party (the issuing company).

Question 101

An accountant’s standard report on a compilation of a projection does not include

Answer 101

a statement that the hypothetical assumptions used in the projection are reasonable in the circumstances.

Question 102

The date of the agreed-upon procedures report is ordinarily determined by

Answer 102

the completion of the agreed-upon procedures.

Question 103

When an accountant accepts a compilation engagement, he or she should indicate that it is

Answer 103

limited in scope and would not include an opinion or assurance on the projected financial statements or the related assumptions.

Question 104

Whenever an accountant reports on prospective financial statements, the report should

Answer 104

include a caveat that prospective results may not be achieved.

Question 105

A compilation of prospective financial statements is not intended to provide

Answer 105

assurance on the prospective financial statements or the assumptions underlying such statements.

Question 106

An examination report on prospective financial statements states that the

Answer 106

prospective results might not be achieved.

Question 107

When performing an attestation engagement related to a client’s prospective financial statements, the accountant should ensure

Answer 107

that the client discloses all significant assumptions that are used for the prospective financial statements.

Question 108

A compilation of a financial projection report describes the limitations on

Answer 108

the usefulness of the projection by including a caveat that the prospective results may not be achieved.

Question 109

If one or more of the significant assumptions do not provide a reasonable basis for the financial statements

Answer 109

an adverse opinion would be issued.

Question 110

This is included in a separate paragraph that describes the limitations on the usefulness of the presentation: “..there will usually be differences between the forecasted and actual results… [that] may be material.”

Answer 110

The accountant’s standard report on an examination of projected financial statements should include a caveat that the projected results may not be achieved.

Question 111

A practitioner may perform an agreed-upon procedures engagement on projected financial statements provided that the projected financial statements include a

Answer 111

summary of significant assumptions.

Question 112

All reports on prospective financial statements require a statement indicating that the

Answer 112

prospective results may not be achieved.

Question 113

A review of pro forma financial information provides limited assurance about the

Answer 113

effect of a future or hypothetical event (in this case, a change in capitalization) by showing how it might have affected the historical financial statements if it had occurred at an earlier date.

Question 114

A presentation of pro forma financial statements should include all

Answer 114

significant direct effects related to the transaction. The presentation does not need to include indirect effects related to the transaction.

Question 115

The accountant’s report on a review of pro forma financial information should include a reference to

Answer 115

the financial statements from which the historical information is derived and a statement as to whether such financial statements were audited or reviewed.

Question 116

An accountant has been engaged to examine pro forma adjustments that show the effects on previously audited historical financial statements due to a proposed disposition of a significant portion of an entity’s business. Other than the procedures previously applied to the historical financial statements,

Answer 116

The accountant should evaluate the pro forma adjustments, but need not reevaluate the entity’s internal control over financial reporting.

Question 117

Negative assurance, not an opinion, may be rendered in an engagement in which the auditor is reporting

Answer 117

on compliance with aspects of contractual agreement in connection with audited financial statements.

Question 118

If the auditor issues a report on compliance with contractual agreements in connection with the audit of financial statements, the report should include a

Answer 118

reference to the specific covenants of the contractual agreements. This is required in cases of compliance or noncompliance.

Question 119

The purpose of examination procedures applied to compliance requirements is for the practitioner to

Answer 119

accumulate sufficient evidence regarding an entity’s compliance with specified requirements to allow for the practitioner to issue an opinion with reasonable assurance.

Question 120

Representations from management regarding compliance with specified requirements must be

Answer 120

in writing. Oral representations are not sufficient.

Question 121

Compliance attestation standards apply for an examination of a client’s compliance with specified requirements

Answer 121

such as debt covenants associated with a bank loan. In addition, examination engagements fall under attestation standards.

Question 122

As risk of material noncompliance increases, detection risk of noncompliance should

Answer 122

decrease to reach a desired level of overall audit risk of noncompliance. This concept is identical to the relationship between risk of material misstatement and detection risk.

Question 123

Tests of the operating effectiveness of controls may be required if any one of the following exist:

Answer 123

1. The risk assessment includes an explanation of the operating effectiveness of controls over compliance,
2. Substantive procedures do not provide enough evidence to support a conclusion, or
3. Tests of controls are required by the applicable governmental audit requirements.

Question 124

Generally Accepted Government Auditing Standards primarily apply to

Answer 124

audits of federal financial assistance and government organizations but have been adopted by some states for audits of state financial assistance and other governmental funding.

Question 125

An auditor of a government entity may use a specialist on the engagement.

Answer 125

The use of specialists is permitted under GAAS. GAAS and GAGAS are the sources of standards for governmental audits.

Question 126

Presumptively mandatory indicates that the requirement must be followed in all cases where the requirement is relevant, except in

Answer 126

rare circumstances in which auditors and audit organizations determine it is necessary to depart from the presumptively mandatory requirement. If, in rare circumstances, auditors judge it necessary to depart from a relevant presumptively mandatory requirement, they must provide a special explanation, which includes their justification for the departure and how the alternative procedures performed in the circumstances were sufficient to achieve the intent of that requirement. Generally accepted government auditing standards uses the term “should” to describe presumptively mandatory items.

Question 127

Government Audit Standards define three types of engagements

Answer 127

1) financial audits
2) Attest engagements
3) performance audits.

Question 128

An auditor who identifies a potential fraud that is significant within the context of the audit under generally accepted government auditing standards would most appropriately respond by

Answer 128

first extending audit procedures as necessary to determine whether fraud has occurred.

Question 129

If the entity does not have adequate documentation to support $5 million in operating expenses paid from federal program funds, then the auditor would conclude that questioned costs of $5 million for operating expenses have been identified.

Answer 129

This will appear on the schedule of findings and questioned costs for federal awards.

Question 130

Government auditing standards require a

Answer 130

written report on internal control in every audit.

Question 131

The report on the audit of financial statements should describe

Answer 131

the scope of the auditor’s testing of compliance with laws and regulations and internal control over financial reporting, and present the results of those tests.

Question 132

The auditor will not express an opinion on the

Answer 132

effectiveness of internal control over compliance.
Documentation of conclusions for an opinion would not be appropriate.

Question 133

When auditing an entity’s financial statements in accordance with Government Auditing Standards, an auditor is required to report on the

Answer 133

scope of the auditor’s testing of internal control, but not on noteworthy accomplishments of the program.

Question 134

Auditors should report on the

Answer 134

scope of their testing of compliance with laws and regulations and of internal controls.

Question 135

A concurrent opinion on the financial statements taken as a whole is

Answer 135

not a required part of the auditor’s report.

Question 136

Per Government Auditing Standards, audit documentation should contain

Answer 136

sufficient information so that supplementary oral explanations are not required.

Question 137

Government Auditing Standards require that the auditor issue a written report on internal control in all audits. As part of this reporting requirement, the auditor must describe the

Answer 137

scope of the auditor’s work in obtaining an understanding of internal control and his or her assessment of control risk.

Question 138

Basic elements of a report on compliance include a statement that the audit should be

Answer 138

planned to obtain reasonable assurance about whether noncompliance could have a material effect on the programs audited.

Question 139

The audit opinion states that the audit was conducted in order to

Answer 139

express an opinion on compliance but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance.

Question 140

The auditor’s report on compliance and on internal control over financial recording (based on an audit) must include

Answer 140

the scope of testing of compliance and internal control.

Question 141

The auditor does not express an opinion on the

Answer 141

effectiveness of internal control over compliance.
Materiality limits would not contribute to that nonexistent objective.

Question 142

The auditor’s report either asserts that there are

Answer 142

no findings or references a separate schedule of findings, which includes disclosure of material instances of fraud and illegal acts.

Question 143

When reporting under Government Auditing Standards, the auditor should consider

Answer 143

whether any noted deficiencies in such internal controls should be reported to specific legislative and regulatory bodies.

Question 144

Material instances of fraud and illegal acts discovered need to be communicated in the

Answer 144

auditor’s report on compliance. If applicable, the report should state that other instances of noncompliance were communicated to management in a separate letter.

Question 145

Under Government Auditing Standards (GAS), the auditor has an

Answer 145

additional responsibility to communicate fraud to individuals contracting for or requesting the audit.

Question 146

The auditor should obtain written representation that management has

Answer 146

responsibility for understanding and complying with compliance requirements.

Question 147

The management letter will include

Answer 147

identification of management’s interpretation of compliance requirements that are subject to different interpretations.

Question 148

The risk-based approach of the Single Audit Act is designed to focus the auditor’s tests of

Answer 148

federal financial assistance on the programs with the highest risk.

Question 149

Under the Single Audit Act, materiality is determined

Answer 149

separately for each major federal financial assistance program.

Question 150

A nonfederal entity that expends federal financial assistance administered by another entity is a

Answer 150

sub recipient. For example, a state might receive federal funds and in turn provides those funds to a not-for-profit organization to accomplish an objective (e.g., mental health care, homeless relief, etc.). The not-for-profit organization would be the sub recipient.

Question 151

A cognizant agency for the audit is typically the

Answer 151

federal awarding agency that provides the most amount of direct funding to a nonfederal entity.

Question 152

If material instances of noncompliance are identified, the auditor should

Answer 152

express either a qualified or adverse opinion on compliance.

Question 153

A preparation engagement is considered a

Answer 153

non-attest engagement.

Question 154

An accountant should establish an understanding with management, and when appropriate those charged with governance, regarding the

Answer 154

services to be performed for the preparation engagement. This should be documented in an engagement letter.

Question 155

Preparation engagements should be performed in accordance with

Answer 155

Statements on Standards for Accounting and Review Services.

Question 156

One of management’s responsibilities in a preparation engagement is for the

Answer 156

accuracy and completeness of the accounting records, which includes the accuracy of significant judgments provided to the accountant who has been engaged to prepare the financial statements.

Question 157

If an accountant is unable to include a statement indicating that “no assurance is provided” on each page of the financial statements in a preparation engagement, then the auditor should either

Answer 157

issue a disclaimer that makes clear that no assurance is provided on the financial statements, perform a compilation engagement, or withdraw from the engagement.

Question 158

If management will not allow a statement to be included on each page of the financial statements indicating that no assurance is provided, it would be appropriate for the accountant to issue a

Answer 158

disclaimer making it clear that no assurance is provided. The accountant could also choose to instead perform a compilation engagement or withdraw from the engagement altogether.

Question 159

An accountant is precluded (prevented) from preparing financial statements that omit substantially all disclosures when the accountant becomes aware that the omission was undertaken

Answer 159

with the intent to mislead users of the financial statements.

Question 160

For a preparation engagement, management takes responsibility for the completeness of information.
Accountants are not required, but may, make

Answer 160

inquiries to verify the completeness of the information provided by the client.

Question 161

An engagement letter should be included in the

Answer 161

documentation of a preparation.

Question 162

In a compilation engagement, the accountant should

Answer 162

read the financial statements for obvious material misstatements.

Question 163

Financial statements compiled by an accountant should be accompanied by a

Answer 163

report stating that the financial statements have not been audited or reviewed

Question 164

A compilation cannot be relied upon to disclose errors, fraud, or illegal acts. Because a compilation is

Answer 164

not an assurance engagement, a compilation engagement does not require the accountant to verify the accuracy or completeness of the information provided by management or otherwise gather evidence to express an opinion or conclusion on the financial statements.

Question 165

The accountant’s report includes a statement that the accountant is not required to

Answer 165

perform any procedures to verify the accuracy or completeness of the information provided by management.

Question 166

In compilation and review engagements, the accountant is not required to

Answer 166

specifically assess fraud risk or to perform procedures designed to detect material misstatements due to fraud or noncompliance with laws and regulations.

Question 167

A compilation provides the

Answer 167

least amount of assurance because it provides no assurance.

Question 168

In order to compile a nonissuer’s financial statements, the accountant should obtain an

Answer 168

understanding of the client’s transaction types and frequency of transactions.

Question 169

The study of relationships among financial statement elements is part of

Answer 169

performing analytical procedures. The auditor is not required to perform analytical procedures as part of a compilation engagement.

Question 170

During a compilation engagement, if the accountant believes that the financial statements are materially misstated, then the accountant should

Answer 170

obtain the additional or revised information needed to correct the financial statements.

Question 171

Compiled financial statements should be accompanied by a report stating that the compilation was conducted in accordance with

Answer 171

SSARS promulgated by the Accounting and Review Services Committee of the AICPA.

Question 172

The accountant’s compilation report should state that the accountant does not express an

Answer 172

opinion, a conclusion, nor provide any form of assurance on the financial statements.

Question 173

A compilation of financial statements is not an assurance engagement, therefore the report does not provide any

Answer 173

opinion or conclusion on the financial statements. The report of a compilation engagement indicates that management is responsible for the financial statements and that the accountant does not express an opinion or conclusion, nor does it provide any form of assurance on the financial statements.

Question 174

The accountant’s report in a compilation engagement should include a statement that the accountant was

Answer 174

not required to perform any procedures to verify the accuracy or completeness of the information provided by management.

Question 175

Documentation provides the support that the accountant compiled with

Answer 175

SSARS when performing the compilation engagement. SSARS does not require internal control procedures, such as review of segregation of duties, to be performed in a compilation engagement.

Question 176

Financial statements of a nonissuer that have been compiled should be accompanied by

Answer 176

a report explicitly stating that the accountant does not express an opinion and stating that the accountant has not audited or reviewed the financial statements.

Question 177

A standard compilation report implies that substantially all disclosures required by GAAP are

Answer 177

included in the financial statements.

Question 178

When an accountant compiles a client’s financial statements accompanied by supplemental information, the accountant’s separate report on the supplemental information should include a

Answer 178

statement that the information has been compiled from information that is the representation of management without audit or review.

Question 179

SSARS does not require that the compilation report be

Answer 179

printed on the accountant’s letterhead, nor does it require a manual signature. Although a signature is required, it need not be manual. Also, the report may be presented in the accountant’s letterhead, but is not required.

Question 180

The standard compilation report includes a disclaimer, indicating that the accountant

Answer 180

does not express an opinion, a conclusion, nor provide any assurance with respect to financial statement presentation. When substantially all disclosures are omitted, the report should also include a paragraph disclosing such omissions and stating that if the omitted disclosures were included, they might influence the user’s conclusions.

Question 181

The accountant may compile financial statements that omit substantially all disclosures provided that:

Answer 181

1. The accountant’s report clearly indicates the omission by including an additional paragraph disclosing such omissions.
   This paragraph should state that if the disclosures were included, they might influence the user’s conclusions, and should indicate that the financial statements are not designed for those who are uninformed about the omitted disclosures; and
2. In the accountant’s professional judgment, the financial statements would not be misleading to users.

Question 182

West, CPA, is engaged to compile the financial statements of Lake Co., a nonissuer. Lake’s financial statements are prepared in conformity with the cash basis of accounting. If Lake’s financial statements do not disclose the basis of accounting used

Answer 182

West should disclose the basis of accounting used in West’s compilation report.

Question 183

An accountant who is not independent with respect to an entity may compile

Answer 183

financial statements for such an entity and issue a report. However, the last paragraph of the report should disclose this lack of independence. The accountant is permitted, but not required, to disclose the reason(s) for the lack of independence.

Question 184

If the accountant is not independent, he should

Answer 184

specifically disclose the lack of independence.
Otherwise, independence is implied.

Question 185

Financial statements reviewed by an accountant should be accompanied by

Answer 185

a report stating that a review is substantially less in scope than an audit.

Question 186

An accountant’s report on a review of the unaudited financial statements of a nonissuer should provide

Answer 186

limited assurance on the financial statements by stating that the accountant performed procedures to obtain limited assurance that there are no material modifications that should be made to the financial statements.

Question 187

Performed by the accountant during a review engagement of a nonissuer in accordance with Statements on Standards for Accounting and Review Services

Answer 187

A. Inquiring about actions taken at meetings of the board of directors that may affect the financial statements.
B. Issuing a report stating that the review was performed in accordance with Statements on Standards for Accounting and Review Services.
C. Reading the financial statements to consider whether they conform with generally accepted accounting principles.

Question 188

A review provides limited assurance that there are

Answer 188

no material modifications that should be made to the financial statements in order for them to be in conformity with generally accepted accounting principles, whereas a compilation provides no assurance.

Question 189

In reviewing the financial statements of a nonissuer, the accountant’s first step would be to

Answer 189

obtain a general understanding of the entity’s organization, its operating characteristics, and its products or services.

Question 190

The accountant is not required to

Answer 190

evaluate control risk or test the operating effectiveness of controls in a review of a nonpublic entity’s financial statements.

Question 191

Before performing a review of a nonissuer’s financial statements, an accountant should obtain a

Answer 191

sufficient level of knowledge of the accounting principles and practices of the industry in which the entity operates.

Question 192

In a review of a nonissuer’s financial statements, an accountant should inquire about

Answer 192

the existence of related party transactions.

Question 193

A CPA usually performs inquiry of management, including inquiring about

Answer 193

restrictions on the availability of cash balances, when reviewing the financial statements of a nonissuer.

Question 194

In a review engagement, the accountant is required to obtain

Answer 194

a representation letter from management.

Question 195

If the review report on the current period includes a separate paragraph describing the responsibility assumed for the prior period’s financial statements, the additional paragraph should explicitly state

Answer 195

that no audit procedures were performed subsequent to the previous period’s audit.

Question 196

If the accountant concludes that the financial statements contain material misstatements, the review report should

Answer 196

be modified to include either a qualified (material but not pervasive issue) or adverse (material and pervasive issue) conclusion.

Question 197

An accountant should add an other-matter paragraph in the review report when the accountant considers it necessary to communicate a matter that

Answer 197

is not presented or disclosed in the financial statements.

Question 198

Since there is appropriate disclosure regarding going concern, and the entity’s ability to continue as a going concern for a reasonable period of time has been alleviated by management’s plans, Baker is

Answer 198

not required to modify the accountant’s review report. Baker may, however, choose to emphasize this issue in the report.

Question 199

Before reissuing a compilation report on the financial statements of a nonissuer for the prior year, the predecessor accountant is required to

Answer 199

compare the prior year’s financial statements with those of the current year.

Question 200

Unaudited financial statements for the prior year presented in comparative form with audited financial statements for the current year should be clearly marked to indicate their status and

Answer 200

I. The report on the prior period should be reissued to accompany the current period report.
Il. The report on the current period should include as a separate paragraph a description of the responsibility assumed for the
prior period’s financial statements.

Question 201

When the prior period has been audited, the accountant should issue the current period compilation or review report, and any additional paragraph should indicate:

Answer 201

• That prior period statements were audited;
• The date of the previous reports);
• The opinions expressed, and, if other than unmodified, the reasons for the modification; and
• That no auditing procedures have been performed since the previous report date.

Question 202

Because comparative financial statements are being reported, and last year’s audit engagement included a scope limitation on the audited financial statements, Hart should include a

Answer 202

separate paragraph in the review report outlining the substantive reasons for the client’s qualified report.

Question 203

When audited financial statements are presented in comparative form with compiled financial statements from a prior year, the auditor should either

Answer 203

reissue his or her report on the compiled statements or include a separate paragraph in the current year report describing the responsibility assumed for the compiled statements.

Question 204

When unaudited financial statements are presented in comparative form with audited financial statements in documents filed with the SEC, such statements should be clearly marked as

Answer 204

“unaudited,” but should not be referred to in the auditor’s report. The statements need not be withheld until audited.

Question 205

Failure to return records to a client after the client makes a demand is considered to be an act

Answer 205

discreditable to the profession, and as such violates the profession’s ethical standards.

Question 206

A CPA must always be objective; however

Answer 206

a CPA need not be independent, except when engaged in public practice

Question 207

A distinguishing mark of a profession is its

Answer 207

acceptance of responsibility to the public.

Question 208

The AICPA code of professional conduct governs any service that a member of the AICPA performs including

Answer 208

compilations and reviews.

Question 209

Professional engagement exceeds the CPA’s personal competence.

Answer 209

Exercise of due care dictates consultation or referral when a There is no requirement to obtain specialty accreditation.

Question 210

Control that a member can exert over the investment. While it is still not desirable to even own shares in a nonclient regulated mutual fund that has investments in the client company, this answer choice is the best given the choices. The member does not control which stocks the mutual fund is investing in.

Answer 210

According the Independence Rule of the Code of Professional Conduct, independence is impaired based on control or the appearance of

Question 211

Any direct financial interest in a client

Answer 211

impairs independence, even if it is immaterial.

Question 212

Is it acceptable for Bingham to join the board of directors of a local bank where several of Bingham’s clients have savings accounts.

Answer 212

It would be acceptable

Question 213

The manager may participate in an audit of a period that begins after his or her employment and disassociation with the client.

Answer 213

Therefore, an audit covering a period beginning November 1, Year 1, is acceptable because the manager completed disassociation from the company on September 1, Year 1. This engagement was not awarded until after the manager was disassociated.

Question 214

CPA’s spouse, parent, child, sibling, etc. are employed by the client in a position that is audit sensitive (i.e., internal auditor, cashier, accounting supervisor, etc.).

Answer 214

Independence of a member is impaired

Question 215

A member’s independence is impaired if a member has a

Answer 215

Loan with a client and that loan is preferential in relationship to “other borrowers.” Since this loan was fully secured and there was no indication of a “preference,” it appears to be in the ordinary course of business. Furthermore, the CPA was no longer a debtor of the financial institution at the time of the audit engagement.

Question 216

The Independence Rule of the Code of Conduct requires that members be independent in audits and attestation services. Independence is impaired if an auditor is an

Answer 216

employee of an audit client or is able to make management decisions on behalf of an audit client. An advisor of an audit client’s board of directors is not an employee, nor is the advisor able to make management decisions for the audit client. The advisor does not make decisions, the advisor simply gives advice that the client is free to accept or reject.

Question 217

A CPA may perform non-attest services for a client and still be independent if the CPA does not serve, or appear to serve, as a

Answer 217

member of client’s management. As making payments from a client’s restricted account and having signing authority and control over such account appear to be duties of management, this would impair the independence of the CPA.

Question 218

With regard to business relationships, independence is impaired if the

Answer 218

member is an employee of an attestation client or is able to make management decisions on behalf of the client. Independence would, therefore, be impaired if a CPA contracted with the client to supervise the client’s office personnel (e.g., in the performance of normal recurring activities).

Question 219

Examples of activities with an attestation client that impair independence would include

Answer 219

bookkeeping activities that include authorizing, executing or consummating a transaction on behalf of a client or preparing source documents or originating data (e.g., purchase orders).

Question 220

The AICPA Code of Professional Conduct’s general standards include

Answer 220

professional competence, due professional care, planning and supervision, and sufficient relevant data. Internal control is not one of the general standards.

Question 221

The General Standards Rule of the AICPA Code of Professional Conduct states that the auditor must have

Answer 221

adequate technical training as an auditor.

Question 222

According to the Independence Rule of the Code of Professional Conduct, a member’s independence is impaired with respect to a client who is more than .

Answer 222

one year overdue in the payment of professional fees. An attestation engagement, such as an audit, requires independence of mind and in appearance. Fees from prior work must be paid in full before the issuance of a report on the following year’s work

Question 223

The Accounting Principles Rule of the Code of Professional Conduct of the AICPA states that if the financial statements or data contain a GAAP departure

Answer 223

1) the departure may be justified if the CPA can demonstrate that due to unusual circumstances, such as new legislation or the evolution of a new form of business transaction, the financial statements would otherwise be misleading.
2) Under these circumstances, the auditor’s report should describe the departure, its approximate effects, if practicable, and the reasons why compliance with the generally accepted principle would result in a misleading statement.

Question 224

Fees are not regarded as being contingent when they are

Answer 224

1. Fixed by courts or other public authorities or in tax matters, if they are based on the results of court proceedings or the findings of governmental agencies. 2. Further, contingent fees are permitted for compilations only if the member includes a statement that the member is not independent.

Question 225

Contingent fee arrangements

Answer 225

impair the auditor’s independence.

Question 226

An ethics ruling related to the Confidential Client Information Rule states that it is

Answer 226

permissible for a member to disclose the name of a client without the client’s consent unless the disclosure of the client’s name results in the release of confidential information.

Question 227

According to the Advertising and Other Forms of Solicitation Rule

Answer 227

advertising that is not false, misleading or deceptive is permitted by the CPA.

Question 228

The Code of Professional Conduct provides that a CPA may not

Answer 228

1) Commit a discreditable act
2) Retaining a client’s records after a demand for their return has been ruled to be a discreditable act.

Question 229

Designating itself as CPAs when not all of its owners are CPAs is

Answer 229

acceptable and acceptable to use the names of one or more past owners.

Question 230

Providing extensive advisory services for a client.

Answer 230

The CPA’s role here is merely as an advisor. Activities would most likely not impair a CPA’s independence.