Becker Audit Mini exam 1

Question 1

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When assessing the competence of an entity’s internal auditor, an independent CPA should obtain information about all of the following except:

A.	Professional certification of the internal auditor.

B.	Education level and professional experience of the internal auditor.

C.	The organizational status of the internal auditor.

D.	Quality of the internal auditor’s audit documentation.

Answer 1

Choice “C” is correct. The organizational status of the internal auditor is used to evaluate objectivity.

Choice “A” is incorrect. An internal auditor’s competence may be evaluated based upon his or her professional certification.

Choice “B” is incorrect. An internal auditor’s competence may be evaluated based upon his or her educational level and professional experience.

Choice “D” is incorrect. An internal auditor’s competence may be evaluated based upon the quality of his or her audit documentation.

Question 2

A special report on financial statements prepared on the cash basis of accounting should include:

A.	A disclaimer of opinion, because an auditor should not report on financial statements that are not designed to be in conformity with GAAP.

B.	A statement that the audit was conducted in accordance with generally accepted auditing standards.

C.	A qualified or adverse opinion, due to the departure from GAAP.

D.	An emphasis-of-matter paragraph including a brief explanation of the cash basis of accounting.

Answer 2

Choice “B” is correct. A special report on financial statements prepared on the cash basis of accounting should include, in the auditor’s responsibility paragraph, a statement that the audit was conducted in accordance with generally accepted auditing standards.

Choice “A” is incorrect. A special report on financial statements prepared on the cash basis of accounting includes positive assurance, not a disclaimer of opinion, regarding whether the financial statements are presented fairly in conformity with the cash basis of accounting.

Choice “C” is incorrect. A special report on financial statements prepared on the cash basis of accounting does not require a qualified or adverse opinion. An “unmodified” opinion may be presented stating that the financial statements are presented fairly in conformity with the cash basis of accounting.

Choice “D” is incorrect. A special report on financial statements prepared on the cash basis of accounting does include an emphasis-of-matter paragraph, but it does not provide an explanation of the cash basis of accounting. Instead, it refers to the note that discusses the cash basis of accounting.

Question 3

Dante, CPA, is auditing the financial statements of Crest Computing. During the previous year, Kratzke & Kratzke, CPAs, audited Crest’s financial statements. Crest has decided to present comparative financial statements for the current year. Which statement is true about Kratzke & Kratzke’s report?

A.	Kratzke & Kratzke should not reissue their report, since they may be unaware of recent circumstances that might have affected the previous year’s financial statements.

B.	Kratzke & Kratzke may reissue their report on the previous statements without performing any additional procedures as long as no changes have been made to those statements.

C.	Kratzke & Kratzke may reissue their report on the previous statements only after performing limited procedures to evaluate the continuing appropriateness of the report.

D.	Kratzke & Kratzke should not reissue their report unless Dante agrees to co-sign that report.

Answer 3

Choice “C” is correct. Kratzke & Kratzke should perform limited procedures, such as reading the current statements, comparing the current and prior statements, and obtaining representation letters from Crest’s management and from Dante.

Choice “A” is incorrect. A predecessor auditor may reissue a previous report after performing certain limited procedures.

Choice “B” is incorrect. Certain limited procedures are required to be performed before a predecessor auditor can reissue a previous report.

Choice “D” is incorrect. There is no requirement that the successor auditor co-sign the report on the previous year’s financial statements, and in fact it would be inappropriate to do so.

Question 4

An auditor would express an unmodified opinion with an emphasis-of-matter paragraph added to the report for:

1. A justified change in accounting principle
2. An unjustified change in accounting principle
3. A justified change in accounting estimate

A. 2, 3

B. 1, 2, 3

C. 1, 2

D. 1

Answer 4

Choice “D” is correct. Only a justified change in accounting principle would result in an unmodified opinion with an emphasis-of-matter paragraph. An unjustified change leads to a qualified or adverse opinion, and a change in estimate does not require an emphasis-of-matter paragraph.

Choice “A” is incorrect. A justified change in accounting estimate does not require the use of an emphasis-of-matter paragraph. A justified change in accounting principle would be the other scenario of the three presented in which an unmodified opinion with an emphasis-of-matter paragraph would be appropriate.

Choice “B” is incorrect. A justified change in accounting principle would be the other scenario of the three presented in which an unmodified opinion with an emphasis-of-matter paragraph would be appropriate.

Choice “C” is incorrect. An unjustified change in accounting principle would lead to a qualified or adverse opinion.

Question 5

Cyrus, CPA is the continuing auditor of Topaz, Inc. During the current year’s audit, Cyrus becomes aware of evidence that affects the previous year’s statements as well as the opinion that was expressed. Topaz is planning to present comparative financial statements that will include last year’s financial statements. How should Cyrus handle this situation?

A.	Report on both sets of financial statements, using the original opinion on last year’s financial statements only after reviewing the previous year’s audit documentation to ensure that auditing standards were followed.

B.	Report on both sets of financial statements, updating the previous opinion for any changes that have occurred.

C.	Report on both sets of financial statements, using the original opinion on last year’s financial statements.

D.	Report only on the current year’s financial statements.

Answer 5

Choice “B” is correct. The auditor reports on the financial statements “taken as a whole”, which applies to all financial statements presented. Since the auditor’s report is generally dated as of the completion of fieldwork for the most recent audit, it is implied that previous reports would be updated.

Choice “A” is incorrect. Regardless of the fact that auditing standards may have been followed in the previous year, the auditor still has a responsibility to update the previous report for changes in circumstances.

Choice “C” is incorrect. Since the auditor’s report is generally dated as of the completion of fieldwork for the most recent audit, it is implied that previous reports would be updated. “Update” can mean either to reaffirm the previous opinion, or to change it based on new circumstances.

Choice “D” is incorrect. The auditor reports on the financial statements “taken as a whole”, which applies to all financial statements presented.

Question 6

Which of the following statements concerning the auditor’s use of the work of a specialist is correct?

A.	The auditor should refer to the work or findings of the specialist in the auditor’s report when an unmodified opinion is issued.

B.	The auditor need not obtain an understanding of the methods and assumptions used by the specialist.

C.	The auditor may engage a specialist and use that specialist's work as audit evidence in performing substantive tests to evaluate material financial statement assertions.

D.	If the specialist is related to the client, the auditor is not permitted to use the specialist's findings as corroborative evidence.

Answer 6

Choice “C” is correct. The auditor may use the work of a specialist to obtain appropriate audit evidence.

Choice “A” is incorrect. Generally the auditor should not refer to the work or findings of the specialist when an unmodified opinion is issued.

Choice “B” is incorrect. The auditor should understand the methods and assumptions used by the specialist.

Choice “D” is incorrect. A specialist who is related to the client may be acceptable in some circumstances, but the auditor may choose to perform additional procedures in those cases. The auditor may still use the specialist’s findings in such situations.

Question 7

Whitney, CPA, is assessing the auditability of Nissen Manufacturing, a possible new client. Which of the following would be least likely to cause Whitney to reject Nissen as a new client?

A.	Management of Nissen is unable to provide financial records for the second half of the year due to a computer malfunction.

B.	Management of Nissen is unwilling to send accounts receivable confirmations, due to a desire not to trouble customers.

C.	Management of Nissen is unwilling to provide all financial records to Whitney, due to a desire to keep such information confidential.

D.	Management of Nissen expresses a disregard for maintaining an adequate internal control environment.

Answer 7

Choice “B” is correct. If a potential client is unwilling to send accounts receivable confirmations, the auditor may perform alternative procedures, such as reviewing subsequent cash receipts.

Choices “A” and “C” are incorrect. If a potential client is unable or unwilling to provide the financial information needed by the auditor to complete the audit, the auditor may not be willing to accept the engagement.

Choice “D” is incorrect. Management’s disregard for its responsibility to maintain an adequate internal control environment compromises its ability to provide reasonable assurance regarding reliable financial reporting and may lead the auditor to decide not to accept a new engagement because the risk of financial statement misstatement is too high

Question 8

Under which of the following circumstances would an adverse opinion be most appropriate?

A.	The auditor was unable to observe client inventory counts by virtue of the fact that the auditor was appointed after balance sheet date.

B.	The financial statements include property, plant, and equipment amounts at fair market value based on management's position that fair market value better depicts true financial position and results of operations of the company.

C.	There has been a material impact on the financial presentations due to a justifiable change in reporting entity, which has been fully disclosed in the financial statements and related footnotes.

D.	The client has severely limited the scope of the audit, not permitting access to outside client legal counsel.

Answer 8

Choice “B” is correct. An adverse opinion is required when serious GAAP problems exist. (GAAP requires that property, plant, and equipment be stated at cost less accumulated depreciation.)

Choice “C” is incorrect. A justifiable change in accounting principle does not result in an adverse opinion.

Choices “D” and “A” are incorrect. Scope limitations, as opposed to GAAP problems, result in qualified opinions or disclaimer of opinion, not adverse opinions.

Question 9

An uncertainty may result in:

1. An unmodified opinion
2. A qualified opinion
3. An adverse opinion
4. A disclaimer of opinion

A. 1, 3, 4

B. 1, 2, 3, 4

C. 2, 3, 4

D. 2

Answer 9

Choice “B” is correct. An uncertainty may result in an unmodified opinion if management’s analysis is supported and properly recorded or disclosed. An uncertainty for which the auditor is unable to obtain sufficient audit evidence would result in either a qualified opinion or a disclaimer of opinion. If the financial statements are materially misstated due to improper accounting for the uncertainty, a qualified or adverse opinion would result.

Choice “A” is incorrect. An uncertainty for which the auditor is unable to obtain sufficient audit evidence would result in either a qualified opinion or a disclaimer of opinion. If the financial statements are materially misstated due to improper accounting for the uncertainty, a qualified or adverse opinion would result.

Choice “C” is incorrect. An uncertainty may result in an unmodified opinion if management’s analysis is supported and properly recorded or disclosed.

Choice “D” is incorrect. An uncertainty may result in an unmodified opinion if management’s analysis is supported and properly recorded or disclosed. If the auditor determines that the financial statements are materially misstated due to improper accounting for the uncertainty (and it is both material and pervasive), an adverse opinion may be issued.