Chapter 1

Question 1

Most authoritative guidance for the auditor of a nonissuer is

Answer 1

General guidance provided by Statement on Auditing standards. Auditors are required to comply with SASs, and should be prepared to justify departures.

Question 2

The Public Company Accounting Oversight Board was established by

Answer 2

the Sarbanes-Oxley Act of 2002.

Question 3

When an auditor is unable to form an opinion on a new client’s opening inventory balances the auditor will issue an unmodified opinion on the current year’s

Answer 3

closing balance sheet only and will issue a disclaimer of opinion on the statements of income, retained earnings, and cash flows.

Question 4

The basic element of an auditor’s report under US auditing standards is that

Answer 4

an audit includes evaluating significant estimates made by management.

Question 5

There is no explicit reference, in an unmodified opinion on comparative financial statement, for

Answer 5

the examination of evidence on a test basis for comparative financial statements. The report says, “an audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements.”

Question 6

A change in accounting principle (i.i., depreciation method) does result in an

Answer 6

emphasis-of-matter paragraph appended to an otherwise unmodified opinion, only when material. An immaterial effect on comparability does not require a emphasis-of-matter paragraph.

Question 7

Confirming with third parties the details of arrangements to provide financial support is an audit procedure that may

Answer 7

identify doubts about the entity’s ability to continue as a going concern. Inspecting title documents provides evidence of ownership of assets but would not identify conditions affecting an entity’s ability to continue as a going concern.

Question 8

Under US auditing standards, the auditor states that the audit was conducted in accordance with GAAS in the

Answer 8

Auditor’s Responsibility paragraph.

Question 9

The auditor expresses an opinion on the financial statements’ conformity with GAAP in the

Answer 9

Opinion Paragraph.

Question 10

When an auditor qualifies their opinion because of a scope limitation, the wording in the opinion paragraph should indicate the qualification pertains to the

Answer 10

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

Question 11

If a company fails to present its statement of cash flows, the auditor would normally conclude

Answer 11

that the omission requires qualification of opinion. It is considered inadequate disclosure.

Question 12

If an auditor concludes that there is substantial doubt about an entity’s ability to continue as a going concern and that the entity’s disclosures are adequate, then the auditor should issue either

Answer 12

a unmodified report with an emphasis-of-matter paragraph or a disclaimer of opinion. An qualified opinion would be give if the disclosures were not adequately disclosed.

Question 13

When management does not provide reasonable justification that a change in accounting principle is preferable and it presents comparative financials, the auditor should express a

Answer 13

qualified opinion each year that the financials initially reflecting the change are presented.

Question 14

Under ISAs, the going concern period must be at least, but not limited to

Answer 14

twelve months from the date of financial statement audit.

Question 15

Under US auditing standards, the going concern period cannot exceed

Answer 15

one year from the date of the financial statement audit.

Question 16

When reporting on comparative financials, an auditor should change the previously issued opinion on the prior year’s financials if the

Answer 16

prior year’s financials are restated to conform with GAAP.

Question 17

If the auditor reissues an audit report at the client’s request, the auditor should date the report with the

Answer 17

original report date on the reissued report. Use of a subsequent date implies that the auditor has done additional work.

Question 18

Dual dating is used when there is a

Answer 18

subsequent event occurring after the original date of the auditor’s report, and the auditor wishes to extend responsibility only for the one event. It is not used for comparative financials, the date from the most recent audit is used.

Question 19

The reporting accountant’s report on the application of the requirements of an applicable financial reporting framework should include a statement that states

Answer 19

that should any facts or circumstances differ from those presented to the reporting accountant, that accountant’s report may change.

Question 20

If management (of a government body) declines to present information required by the GASB, the auditor should issue an

Answer 20

unmodified opinion with an other-of-matter paragraph.

Question 21

The report options for financials prepared for the use in a foreign country depend upon the intended distribution. Therefore, the auditor should

Answer 21

obtain an written representation letter from management regarding the purpose and uses of the financials.

Question 22

Information accompanying audited financials in a client-prepared document that are materially inconsistent with the financials and the financials do not require revision the auditor should

Answer 22

request the information be revised.

Question 23

When reporting on the application of an applicable financial reporting framework to a specific transaction, the CPA should include in their report a statement that states

Answer 23

the preparers of the financials bear the ultimate responsibility for proper accounting treatment. The report also states that the engagement was performed in accordance with AICPA, not SSARS.

Question 24

Decreasing the acceptable level of risk will result in a

Answer 24

larger sample size, which the auditor might not want to do unless the cost and effort of selecting additional sample items is low.

Question 25

If the auditor has disclaimed an opinion on the financials as a whole, the auditor may express an opinion on an entity’s accounts receivable balance only if the special report on accounts receivable is presented

Answer 25

separately from the disclaimer of opinion on the financials and the accounts receivable balance does not constitute a major portion of the entity’s complete set of financials.

Question 26

The auditor should consider the methods the entity uses to process accounting information in the planning of the audit because such methods influence the

Answer 26

design of internal control.

Question 27

The completeness assertion states that all transactions that should be recorded have been recorded. Account receivable confirmations rarely provide evidence about completeness since

Answer 27

the recipients of the confirmations have a vested interest in not reporting understatements (i.e.; transactions that have not yet been recorded).

Question 28

The ethical standards that apply to the audits of issuers (SOX/PCAOB/SEC) require that the lead partner to

Answer 28

rotate off the audit engagement after 5 years. The AICPA Code of Professional Conduct (for nonissuers), does not require audit partner rotation.

Question 29

Loans to or from clients, other than loans from financial institutions under normal lending policies, are

Answer 29

prohibited for audits of issuers and nonissuers under all ethical standards.